Kraft Enters the Premium Coffee Market in North America

With Starbucks taking over responsibility for distributing their namesake fresh packaged coffee in retail, Kraft will experience a decline in revenue. Obviously Kraft is looking to make-up this loss. Recently they announced that they will distribute their Gevalia brand in US retail.

The question is: Is Kraft serious about seriously challenging Starbucks for a leadership position in premium coffee or is the company just trying to keep a presence in the high end of the category?

Kraft’s situation

Kraft built Starbucks packaged coffee into the #3 brand in retail value in the US. In 2010 Starbucks fresh coffee distributed by Kraft in retail had a 5.4% value share of fresh coffee, trailing only Folgers with a 12.3% retail value share and Maxwell House with a 7.5% retail value share. This amounted to over US$400 million in retail sales in 2010 for Starbucks fresh coffee. This is a lot of retail revenue to make up and it is unlikely Maxwell House can do the job.

The average retail price of Maxwell House in 2010 was US$8 per kilogram vs. US$29 per kilogram for Starbucks. Clearly Maxwell House and Starbucks are purchased by consumers to meet different needs. So Kraft not only has a lot of revenue to make up, the company also has a gap in their portfolio in meeting consumer needs in the fresh coffee category.

This sounds like a large amount of retail sales but Kraft is a very large company so it’s important to put US$400 million in perspective. This represents less than 6% of Kraft’s global coffee retail value in 2010 and under 1% of Kraft’s global retail sales (when including Cadbury). Even looking at only North America, Starbucks fresh coffee distributed by Kraft is just 2% of the retail value of all products sold by Kraft. Additionally, Kraft has five brands that generate over US$1 billion in retail value annually.

Kraft not only has a lot of brands to choose from to make up the lost sales from Starbucks, the company also has other resources. Kraft is the largest food company in North America. This gives Kraft leverage with retailers that Starbucks will not be able to duplicate. Additionally, Kraft has a direct sales force that helps in retail execution. Kraft also has an impressive advertising and consumer promotion budget to support its vast array of brands. The issue for Kraft is not only making up lost revenue but also strategic management of its brand portfolio.

The case for and against Gevalia

Gevalia is a premium priced brand that has been around for a long time. However, currently it is only sold direct to the consumer. The brand has limited awareness and usage is in a very limited population. It will be competing against both Starbucks and Dunkin Donuts.

With the right amount of attention, Kraft’s sales force could achieve impressive retail distribution of Gevalia in a short amount of time. Also, Kraft could spend generously on advertising and consumer promotion to generate awareness and give Gevalia a solid brand image. Kraft could even do extensive sampling of Gevalia so consumers could judge its quality vs. its better known competitors.