Keurig Green Mountain is a beverage company that’s reshaping how people enjoy and consume their beverages. Keurig Green Mountain has become a household brand through innovative technology and strategic brand partnerships (Keurig Green Mountain, Inc.).

Final Project

Matthew Bogdanowicz

Southern New Hampshire University

MBA 640

Keurig Green Mountain is a beverage company that’s reshaping how people enjoy and consume their beverages. Keurig Green Mountain has become a household brand through innovative technology and strategic brand partnerships (Keurig Green Mountain, Inc.). Keurig Green Mountain is a personalized beverage/brewing system with over 445 beverage choices from over 70 brands, letting each individual create a single brew of their choice that compliments their taste palette (Keurig Green Mountain, Inc.). Currently, the company is a North American company, based in the United States and Canada (Keurig Green Mountain, Inc.). In 2016, Keurig was considered the number one brewer brand in the United States (Keurig Green Mountain, Inc.). Keurig Green Mountains vision: “Become the world’s leading personal beverage systems company.” (Keurig Green Mountain, Inc.)

In order to become the world’s leading personal beverage systems company, Keurig Green Mountain needs to become a global organization outside of North America. The proposal for this is the begin global expansion by starting with India.

India’s long been a country of tea drinkers until recently where it’s become common and on trend with India’s younger generations to consume coffee (Hannon 2012). Today, more than half of India’s population is under the age of 25 (Fuller 2015). The cultural shift has created a dramatic increase in coffee houses where it’s become a popular place to hang out (Hannon 2012). India is privy and heavily influenced by American culture even with their coffee. There’s been an increase in brands such as Starbucks and Lavazza (Hannon 2012). This trend is so deeply in effect that over the past decade, coffee consumption has doubled in India over the past decade (Hannon 2012). This is a perfect opportunity for Keurig Green Mountain to partake in global expansion.

One of Keurig Green Mountains biggest downfalls is their dependence on the United States market and their ever-growing competition (Keurig Green Mountain, Inc. SWOT Analysis 2016). In 2012 when the company’s patent on K-cups expired the market was saturated with competitors less expensive coffee pods, hurting the company’s market share (Govindarajan 2016). The company keeps trying to protect their industry and create products that give them control in the US market with items such as Keurig 2.0 and Keurig Kold which have done nothing but upset and alienate the consumer (Govindarajan 2016).  While there are more competitors than ever, the constant growth of the coffee industry is a perfect opportunity for the company.

India is currently experiencing significant growth with the power to become one of the top three largest economies in the world within the next ten years (Fuller 2015). Currently, India’s population stands at 50 million with 5% of that number accounting for India’s middle class (Fuller 2015). With the significant growth in place, economists believe that India’s middle class will expand from 2.5 million (5 % of 50 million) to 200 million within the next 5 years and soar to 475 million by the year 2030 (Fuller 2015). India is the world’s fastest growing economy and retail demand is soaring due to the expanding middle class, urbanization, and more women entering the work force (Pahwa 2016). India’s retail has grown at the compound annual rate of 8.8% between 2013 and 2015 (Pahwa 2016). Major retailer, Walmart, plans on expanding their stores in India, opening 70 more stores by the year 2020 (Pahwa 2016). In the US, Keurig Green Mountain relies heavily on their contract sales with Walmart (Keurig Green Mountain, Inc. SWOT Analysis 2016).

Keurig Green Mountain has always had great investment in the strategic partnerships. They have a distribution partnership with Walmart making them the only single-cup brewing system available at Walmart (Keurig Green Mountain, Inc.). Other partnership deals made have been with Kraft, Nestle’, Subway, Starbucks, Dunkin Donuts, and more (” Distribution Deals With Major Coffee Brands To Help Keurig Green Mountain Gain Market Share” 2014). If Keurig Green Mountain can expand on these partnerships, they can begin expanding and moving their products into India’s retail sector. Nescafe, a product of Nestle, is the most famous and oldest coffee brand in India and has the strongest hold on the Indian coffee market (website). Other popular brands to partner with in India would be Tata, Bru, Davidoff, Narasu’s, Leo, Lavazza, Bayar’s, and Café Rio (“Top 10 Best Coffee Brands in India 2017” 2016). Keurig Green Mountain can create distribution contracts with major department store retailers in India with stores such as Walmart and Future Group, a company in India that runs the largest chain of department stores (Sanjai 2016).

Future Group is expected to grow between 25% and 28% over the next year and aims to reach 1 trillion rupees in sales by 2021 (Sanjai 2016). Everyone believes and that there is no stopping the Indian economy and that inflation is under control. (Sanjai 2016). Real estate costs are also beginning to decline making it a good time for Keurig Green Mountain to have a location there (Sanjai 2016). Keurig Green Mountain already has a supply chain in India and believe in community outreach to improve the lives of people in the communities where their products originate by reducing poverty and hunger, improving agricultural practices, and promoting environmental sustainability (Keurig Green Mountain, Inc.).

The Indian expansion project would be by setting up a factory in India or in a relatively cheap Asian market to reduce transportation costs, import taxes, and to reduce slow supply chains (Govindarajan&Bagla 2016). To make the expansion of manufacturing in India, creating partnerships, and marketing, we would need to infuse $2 million dollars into the expansion over the next 5 years to have financial stability in the country by the year 2022. In 2014, Keurig purchased a 585,000 square-foot building for renovation and plan on investing $337 million into the building (McQuiston 2014). Investing in the manufacturing plant will help reduce the cost long-run of the product as it hits the shelves. Smart phones in India are also skyrocketing, making online ordering become increasingly popular. By 2020, India expects online merchants will be as large as their brick-and-mortar stores (Govindarajan&Bagla 2016). With every company putting their efforts into expansion in India, this makes perfect sense for Keurig Green Mountain based on current consumption trends and economy. Keurig also already has strategic partnerships with many of the companies that are already successful or seeking expansion in India making the transition easier for the company. Keurig Green Mountain could get investments to help pay for the venture from Nestle, Walmart, and Coca-Cola.

With an infusion of cash to invest in an expansion in India, Keurig Green Mountain has the potential to reach a whole new level of success and consumers that are young and looking for hip American trends. A lot of the youth that is making the coffee industry soar in India are enjoying the social benefits of it and using it as way to substitute grabbing an alcoholic beverage with their friends as in their culture it is still frowned upon. India is catching on to American trends and the economy is skyrocketing to new levels. The population of the country will continue to increase as well as the level of middle class making the country a top contender within the next ten years. Keurig Green Mountain should stabilize themselves now to be part of the economic expansion. They have not reinvented the wheel with their updated brewers and consumers are having a hard time finding reason to repurchase something they already have causing a decline in brewer sales and making the company rely solely on their beverage products. It is time for new countries to be introduced to these products and to place new strategic partnerships in place so that they can limit the competition.

When viewing 2013 data on countries that consumed the most coffee (per person on average), the United States and Canada didn’t even make the top ten, rather they placed nineteenth and twenty-second (“Caffeine (Coffee) Consumption By Country”). The United States is however, the largest buyer of coffee, worldwide (“Caffeine (Coffee) Consumption By Country”). It still seems, however, that KGM is not tapping into reaching their full potential and need to expand to other booming economies and high consumption countries before competitors beat them to it.

The company has had major success due to their innovative K-cup. The K-cup is an individual serving coffee pod that allows the consumer to pick and choose which brand and beverage they want to drink (Govindarajan 2016). In 2012, the company’s patent on K-cups expired and competitors began flooding the market with less expensive coffee pods (Govindarajan 2016). This greatly affected the company’s market share (Govindarajan 2016).

            To stay ahead of competitors KGM released their product Keurig 2.0 in 2014 (Govindarajan 2016). The new Keurig had digital rights management technology that wouldn’t accept coffee pods that were not K-cups (Govindarajan 2016). Due to the fact that they did not innovate a new business model and instead created a product to protect their current performance, it was a complete failure (Govindarajan 2016).

            KGM went on to release their new brewer, Keurig Gold, last year. The new brewer has the capability to brew cold beverages such as sparkling waters and soda (Govindarajan 2016). The product has received backlash stating that the machine is too big, too loud, and it takes too long to brew (Govindarajan 2016). Other complaints are that you can buy a two-liter bottle of soda for almost the same price as an eight-ounce beverage pod (Govindarajan 2016).

            In 2015, KGM saw declines in the company. Their stock fell by over 30% even with a buyout offer from JAB Holding Company (Golden 2016). The company had a few low points such as having a major recall on the Keurig Mini brewers and the poor sales of the newly launched Keurig 2.0 in 2014, leaving retailers with large inventories left to unload (Golden 2016). What’s worse is that in Q3 and Q4 of 2015, K-cup sales declined (Golden 2016). This is a first ever for the company.

Other internal factors that KGM have recently faced is the poorly conceived Keurig Kold. KGM has laid off 130 workers that manufacture the product and is now offering refunds to consumers who have purchased Keurig Kold because they are discontinuing the production of the new pods once the current inventory runs out (Wattles 2016). This occurs only after ten months since the products release. KGM overcharged for the item, charging $370 per brewer compared to competitor’s prices between $80 – $200, making it impossible for retailers to sell (Wattles 2016). The brewer was also made much larger than competitors, creating dissatisfaction with the consumer. With Coca-Cola investing money in a partnership in KGM, this flop due to the company’s poor product concept may cost them a beneficial partnership (Wattles 2016).

One of the major risks expanding KGM to India is unforeseen costs. KGM needs to be aware of the way people live and buy consumer products in India. Today in India 39% of the population lives with less than $1 a day (“Entering the Market in India”). There’s problems with the country’s transportation, power grid, and education (“Entering the Market in India”). The opportunity lies in the fact that India is one of, if not the most, promising economies in the world. The middle class is expanding at lightning speed and that means increased consumer activity. By the year 2030, India’s middle class will consist of 475 million citizens (Fuller 2015). India is the most populous democracy in the world and one of the largest countries in the world (“Entering the Market in India”). India accounts for a large portion agriculture at 28%, having the ability to produce coffee beans (“Entering the Market in India”).

When doing business in India, one major external concern is climate and natural disasters. In 2015, India was among the top three countries with the most natural disasters costing the country $3.30 billion dollars in economic damages (Mitra-Jha 2016). Drought was a major issue in 2015 and they expect it to continue until at least 2017 (Mitra-Jha 2016). Being deficient on water threatens crops when the country had a $370 billion agricultural sector (website). The country also accounted for 30% of deaths caused by heatwaves in 2015 (Mitra-Jha 2016). If the climate cannot support food and water than the consumer is not going to want or afford products from KGM.

Competition should be low for KGM to expand into India. Indian consumers are switching from instant coffee to brewed coffees now that coffee shops are becoming on cultural trend in the country with the expansions of coffee houses that offer wide assortments of coffee beverages like Starbucks (“BRAND INDIA PLANTATIONS”). With coffee shops still a relatively new trend and the obsession with American culture, KGM has a lot of opportunity in the market. As tourism continues to increase, the middle class rises, and the younger generation expands, KGM has longevity in the country. 70% of coffee drinkers in India still drink their coffee at home (Narayan 2012). The most expensive cup of coffee is still under $1 in India (Narayan 2012). KGM needs to make sure the product is affordable otherwise they are at risk for failure of implementing their products.

Coffee board chairman, JawaidAkthar has stated that coffee consumption in India has grown 6% annually since the year 2000 (“Steady rise in India’s coffee, tea consumption” 2011). Being that 70% of the coffee consumed is at home and the average US price per k-cup is $0.53 (“K-Cup Economics – Comparing Coffee Costs with Keurig” 2015) which still costs less a cup of coffee at Starbucks with the same variety and quality. With such a fast-paced expansion, even if sales fell by 20%, KGM will still come out ahead and be lucrative due to their partnerships

The financial projections of the company are forecasted as follows, with a significant increase each year that is when factors are held constant. These financials are therefore subject to variations depending with the specific economic conditions in the major target markets and the home country economic factors. The projection clearly shows a year by year increase in the net sales after factoring in the major sales costs which include cost of goods sold, advertising and administration costs. The advertising cost will be definitely necessary to ensure that the expansion of the markets to India is coupled with a strong positioning strategy to make the brand of KGM as relevant as possible in the new Indian market. Although it has been stated above that KGM does not expect a lot of competition, promotional activities cannot be overlooked.

KGM Financial Projections
Year	2017	2018	2019	2020	2021
Sales	$        300,000	$        315,000	$        330,750	$        347,288	$        364,652
Cost of Sales(40%) of sales	$        120,000	$        126,000	$        132,300	$        138,915	$        145,861
Advert(2%) of sales	$            6,000	$            6,300	$            6,615	$            6,946	$            7,293
Administration (2% of sales)	$            6,000	$            6,300	$            6,615	$            6,946	$            7,293
Net Sales	$        168,000	$        176,400	$        185,220	$        194,481	$        204,205

As stated above, these financials would vary with the reality depending on a number of factors.  Assuming that the actual sales either increase or decrease by 20% the following figures will represent the net cash flows expected. To begin with, the table below represents the projections assuming that the actual sales increase by 20% which can be attributed to excellent market response as well as proper positioning of KGM’s brands in the target markets, innovative and creative design of the product to suit the needs of the customers.

KGM Financial Projections assuming Sales increase by 20%
Year	2017	2018	2019	2020	2021
Sales	$        360,000	$        378,000	$        396,900	$        416,745	$        437,582
Cost of Sales(40%) of sales	$        120,000	$        126,000	$        132,300	$        138,915	$        145,861
Advert(2%) of sales	$            6,000	$            6,300	$            6,615	$            6,946	$            7,293
Administration (2% of sales)	$            6,000	$            6,300	$            6,615	$            6,946	$            7,293
Net Sales	$        228,000	$        239,400	$        251,370	$        263,939	$        277,135

The following table will show a scenario whereby the expected sales would decrease by 20% and the total impact on the net sales of KGM. The real impact is a decline in the expected cash flows. This would be attributed to factors like improper risk mitigation process or management, or market failure of the product being launched in India, or slow response by customers in target markets, or poor market targeting strategy or even sales representatives being unmotivated towards driving value for the growth of the company sales volumes and revenues.

KGM Financial Projections assuming Sales decrease by 20%
Year	2017	2018	2019	2020	2021
Sales	$        240,000	$        252,000	$        264,600	$        277,830	$        291,722
Cost of Sales(40%) of sales	$          96,000	$        100,800	$        105,840	$        111,132	$        116,689
Advert(2%) of sales	$            4,800	$            5,040	$            5,292	$            5,557	$            5,834
Administration (2% of sales)	$            4,800	$            5,040	$            5,292	$            5,557	$            5,834
Net Sales	$        134,400	$        141,120	$        148,176	$        155,585	$        163,364

The above analysis shows that the proposed investment is quite risky but if well managed at least to mitigate loss from controllable risks in the business, the risk could be turned into a profitable venture. Again, business risk is real and opportunities present themselves alongside with challenging risks that call for proper strategic planning and project management practices to see the business through. The volatility of the forecast can also be explained in terms of economic risks that need to be well monitored so as to ensure they do not adversely affect the business performance.

In evaluation of the viability of the project, the concept of time value of money cannot be overlooked. The time value of money is a concept based on compounding or discounting of cash flows at various points in time so as to either bring them into a present value position or a future value position. In the case of KGM, the net present value of the business for instance would help to find out if it is a viable business to risk investing in. If the calculated net present value is positive, then a conclusion to invest in the business is arrived at, while a negative value is a red flag on investment on that project.

On the other side, the payback period simply shows the amount of time or years in which the initial outlay is expected to be fully paid back by the project cash flows. It does not use any discounting as it is the case with the net present value. In this case, a considerate period which is reasonable enough is set by the investor. For instance, KGM investors can set a maximum of 5 years to have their initial outlay or investment having been paid back. If the actual payback period of the project calculated from the projection is either equal or less than the set limit, the project is viable and acceptable for investment. However, if the payback period is more than the set period, the project is not fit to invest in.

            KGM plans on using the project expansion to help expand the company’s income. The company intends growing its sales by 8% annually due to the large market increase from entering the Indian market. Because KGM will be entering a new market they will increase net income due to the increase in sales. With income being produced in India and not just North America a 4% increase of total sales and net income of the company is expected. The return of capital will improve due to the benefits on the project (Treadway 2015). There’s other benefits as well such as increased re-investment due to the increase in the market share from global expansion.

            Overhead for KGM will increase as well. Property, machines, and equipment will increase due to the expansion as well as the increase in workers needed. A license acquisition for the expansion will also increase the overall total costs of the project.

Cost of new production equipment and machinery including setup cost = $20,000,000

Expenses of hiring and training new employees = $1,250,000

Pre-start up advertisement costs and license acquisition = $ 200,000

Additional operating costs = $1,000,000

Unit sale forecast

Year 1 = 2,000,000

Year 2= 6,000,000

Year 3 = 12,000,000

Year 4 = 18,000,000

Year 5 = 21,000,000

Year 6 = 21,000,000

Year 7 = 21,000,000

Year 8 =21,000,000

Year 9 = 21,000,000

Year 10 = 21,000,000

Unit price per year = $60

Unit cost of manufacturing = (60% of the unit price)

The assumption is that from year 6 the production of unit remains the same.

Income and Expenditure Budget for the Next 10 years of the Keurig Green Mountain (KGM) Cooperation due to new Project Installation

Keurig Green Mountain (KGM) Company

Estimated Cash Flow

Global Expansion projects (000,000s)

Revenue and Gross Margin	Year 1	2	3	4	5	6	7	8	9	10
Units	2	6	12	15	18	21	21	21	21	21
Revenue (sales)	$120	$360	$480	$720	$1080	$1,260	$1,260	$1,260	$1,260	$1,260
Costs	$72	$216	$432	$640	$900	$1,080	$1080	$1,080	$1,080	$1,080
Gross margin	$48	$144	$48	$80	$108	$180	$180	$180	$180	$180
Tax deductible expenses
Fixed Costs	$90	$90	90	90	90	90	90	90	90	90
Depreciation	$20	20	20	20	20	20	20	20	20	20
General overhead	$2.4	$4.4	$6.3	$7.2	$8	$9	9	9	9	9
Total	$122.4	124.4	126.3	127.4	128	129	129	129	129	129
Working capital
Accounts receivable	$14	15	20	25	26	26	26	26	26	26
Inventory	$1	2	2	2	3	3	3	3	3	3
Payables
Working capital	$2	$3	$5	$6	$6	$6	$6	$6	$6	$6
Total	($16)	(20)	(27)	(33)	(35)	(35)	(35)	(35)	(35)	(35)
Total tax	$10	$12	$12.5	$13	$14	$14	$14	14	14	14
Net cash flow
Net cash	($28.4)	($34,4)	($30.7)	($30)	$36	36	36	36	36	36

The assumption is that the cash flow doesn’t change flow year 6. The price per unit does change over the same period. Other assumptions are that the demand of products will increase due to the expansion. It is assumed that the price of products in India will reflect those in the United States. It is also assumed that employee wages in India are the same as those in North American employees. Lastly, it is assumed that the capital purchase costs will be incurred only in the first year of the India expansion project.

The net cash of the business without the project is equal

Net cash flow	Year 1	2	3	4	5	6	7	8	9	10
	$18	$17	$16	$20	$21	$24	$25	$24	$22	$30

The net cash for the Company with the project

Net cash flow
Net cash	($28.4)	($34,4)	($30.7)	($30)	$36	36	36	36	36

            The company will use a combination of funding the project by having both internal and external funding. The benefits of internal funding are shareholders will retain ownership of the company. The less external funding provided, the more the shareholders can retain ownership. This will also create less interest in comparison to equity and loan financing giving the company less debt. The disadvantages of internal funding are no tax benefits and restricted funding. If current finances are already budgeted towards expansion it will put strains on the company, they would not face had they borrowed the money instead. Therefore, a combination of both funding methods is best.

Financial Ratios of the Keurig Green Mountain

Equity Ratio = total equity/ total assets

            Total equity = $2,709,358

            Total assets = $4,001,577

Equity Ratio = 2,709,358/4001577

                        =0.68

Debt Ratio = total liabilities/ total assets

                        =1,400,000/4001577

                        =0.35

Asset turnover ratio = 0.32

            The company is in good financial health to take on expansion. KGM also remains high in their industry as a reputable company, receiving many awards and recognition such as ranking on Prophet’s Brand Relevance Index, 2015 Newsweek Green Rankings, Admired Company 2015, Largest Company by Revenue per State, and Top 100 Consumer Goods Companies (“Awards & Recognition”).

            KGM has created brand loyalty and goes above and beyond for the consumer to give them the customized experience that they need by providing a creative, streamlined product that is easy to use. It is clear that this is the case by the awards received. They not only strive to do good by the consumer but by the environment.

References

Distribution Deals With Major Coffee Brands To Help Keurig Green Mountain Gain Market Share. (2014, August 28). Retrieved from http://www.forbes.com/sites/greatspeculations/2014/08/28/distribution-deals-with-major-coffee-brands-to-help-keurig-green-mountain-gain-market-share/#4ef980e61c27

Fuller, E. (2015, September 11). India: Asia’s Next Economic Dynamo? Retrieved from

http://www.forbes.com/sites/edfuller/2015/09/10/india-asias-next-economic-

dynamo/#5a9e9f403ae6

Govindarajan, V. (2016). What Innovative Companies Can Learn from Keurig’s Highs and Lows. Harvard Business Digital Articles, 2-4.

Govindarajan, V., &Bagla, G. (2016, October 10). Two Ways to Break into India’s Consumer Market. Retrieved from https://hbr.org/2016/10/two-ways-to-break-into-indias-consumer-market

Hannon, E. (2012, February 8). India’s Coffee Consumption Doubles Over Last Decade.

Retrieved January, from

http://www.npr.org/2012/02/08/146565901/young-people-get-

india-interested-in-coffee

 

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