Heineken: Disrupting a Commodity Business

This week, guest columnist Zack Urlocker combines two of our favorite topics: disruption and beer! 

Most of the time when people talk about disruption they focus on  high-tech companies: Google, RIM and others.  Certainly these companies have used technology innovation to disrupt their markets and solve new problems.  But sometimes disruption is about improving the experience, accessibility or convenience of a product through distribution or delivery, such as NetFlix did in the DVD rental business.

Changes in distribution or delivery can in turn can unlock new uses and expand the market; especially if the changes are difficult or expensive for competitors to copy.  Part of NetFlix's success is no doubt because they got a very long lead ahead of rival Blockbuster which did not recognize the convenience introduced by using the post office as a delivery channel and did not want to undermine its core business.

In this example, we'll look at one of my favorite products: beer.  Heineken competes in one of the most commoditized and conservative markets around.  But instead of trying to innovate based on a new flavor or new style of brewing, Heineken focused on creating a packaging system that provides a better customer experience and likely increases consumption.

What is the Heineken DraughtKeg?  From the consumer perspective, it's 1.33 gal (5 liters) of premium draft imported beer at a cost per serving that's just slightly more than a typical twelve-pack.  That gets you around 14 12 oz servings, depending on how much foam you like. The price is just under $20.

What makes the DraughtKeg unique is that, as its name implies, it's real draft beer from a keg, only scaled down for convenience.  Testers report that it tastes fresher than bottled beer, which is due to the way it is dispensed via CO2 cartridge --just like draft beer in bars.  But unlike a normal 70 pound keg, you can get it at your local store without a pickup truck and a team of guys.  The mini-keg weighs around 12 pounds (5.5 kg) and is fresh for 30 days after it's opened.  So the Heineken DraughtKeg provide a  keg taste experience without all the hassle and without the need to consume the entire keg in one sitting. (Though you can if you want.)   No doubt the DraughtKeg will be featured at many home parties in the fall.  It's perfect for watching a game on TV, an office party, or any other social occasion.  The DraughtKeg has some novelty, which in itself add to the fun. 

Development of the DraughtKeg took Heineken nearly 10 years and it cost them more than $15 million dollars to build a new production line.  Because Heineken is selling a premium beer, the added fixed costs can be ammortized over the price of the beer at about a penny an ounce compared to bottled beer.  This 8-9% the cost increase is not negligeable to consumers, but it is well within the reach of the premium beer drinkers Heineken is targeting.  This turns out to be an important part of Heineken's strategy: it's not competing at the low-end of the market.  As a result, Heineken is unlikely to be challenged by a low-end Budweiser Keg.  The margins at the low-end are too thin to support this type of a delivery system. 

Features or Convenience?  If you're in a business that is increasingly being commoditized you might be tempted to try to come up with new features (or in this case, flavors) to stand out.  But in a commodity market, that may be the wrong strategy, especially if the product has already surpassed the quality expectations of most customers.

The DraughtKeg is not a new trendy style or flavor of beer.  In fact, it's the same Heineken beer they've been brewing for more than 100 years.  What's new here is the packaging and the delivery system.  In other words, they improved the experience in how their commodity is delivered to the consumer. 

And since they did not change the proven Heineken recipe they reduced one of the key risks in consumer marketing that customers would not like the change.  Of course, there is still risk in any consumer product changes, but not as much as, say, introducing a New Coke recipe or launching the Zima malt beverage.  Both those moves cost their companies many millions of dollars in losses.

According to Forbes, the Heineken DraughtKeg provides the company not only with added revenues (estimated $300 million) but also better shelf space from retailers due to the higher margins.  So it looks like this move will payoff for Heineken and help them stand out in a crowded market.

Questions to consider:

• Are there barriers your customers have in accessing or using your product?
• Can you improve the convenience and accessibility in such a way that customers will use more of it?
• Are there new uses for your product beyond the mainstream that can provide opportunities for growth?
• Are there ways you can stand out in the market without changing the product itself?

The Heineken commercial below clearly illustrates some of the perils of home-kegging before the DraughtKeg.

Zack Urlocker is a software executive and regular blogger on open source technology at TheOpenForce and InfoWorld and about music at GuitarVibe. 

** Other Sources **

Forbes has a good article "The Keg That Scored" on the development of the DraughtKeg and the engineers behind it.

Comments

[Anthony Kuhn]

Michael:

This "innovation" is actually a revisitation to the old 5 liter kegs which my Dad used to bring back from trips to England as a US Air Force crew member, only this time with a CO2 injection system to keep the beer fresher, longer. I just might have to check the new "DraughtKeg" out if I can afford to pay the premium over the cost of 12 ounces of beer in a regular bottle. Innovation and extra cost! What will Heineken think of next? Maybe premium light beer? Too late! I cross-posted on your piece to http://blog.innovators-network.org The Innovators Network is a non-profit dedicated to bringing technology to startups, small businesses, non-profits, venture capitalists and intellectual property experts. Please visit us and help grow our community!

Best wishes for continued success,

Anthony Kuhn
Innovators Network