Is it time up for K-Cup?

Few could have predicted that when Keurig’s K-Cup single-serve system was first launched in 1998, it would succeed to the extent that it has today. Keurig Founder John Sylvan’s dream of providing efficient and flavourful coffee to his co-workers has birthed a product that is now featured in millions of offices and households across North America. Last Christmas alone, a total of 4.95 million Keurig branded brewers were sold over 13 weeks, while the sale of single-serve packs brought in over US$800 million for Green Mountain Coffee Roasters, Inc. (GMCR) for the period. “It would have been difficult for anyone to truly predict the incredible popularity that the Keurig system currently enjoys within homes and workplaces,” GMCR’s VP of IR & Corporate Communications, Suzanne DuLong, tells Global Coffee Review. “Consumers seem to have an emotional connection to their brewers and many are extraordinarily passionate about the system.” GMCR made its initial investment in Keurig in 1996, owning it in full by 2006. DuLong says that the Keurig brewer has revolutionised the way people drink coffee in private spaces. She attributes its popularity to the unique combination of the advanced brewing and dosing technology, coupled with GMCR’s specialty coffee portfolio, including partner brands. According to the NPD Group, which specialise in consumer market research, Keurig single cup brewers were in the top four bestselling coffee makers and had five products in the top 10 during GMCR’s fiscal first quarter in 2013. The Keurig brewing system was named coffee maker “Brand of the Year” in the 2012 and 2013 Harris Poll EquiTrend Equity Studies – an annual brand health assessment that surveys thousands of US consumers online about their brand perception. “The Keurig brand truly connects with consumers by offering choice, quality, convenience and simplicity in their everyday lives,” DuLong says. “The success of our single cup brewing system has been driven by offering a full range of high quality brand and beverage varieties for our Keurig branded single cup brewers that are at the cutting edge of technology – all designed to provide delicious beverages at the touch of a button.” It’s this “touch-of-a-button” technology that seems to have attracted converts from every coffee subculture. For many coffee connoisseurs, gone are the days of special ordering select beans, grinding them in a noisy grinder, fumbling with a machine and cleaning up afterwards. Flavour now comes in a small capsule that is swiftly placed in a single-serve brewer and disposed of effortlessly. It’s perhaps this convenience that has allowed consumers to abandon their sense of nostalgia when it comes to traditional tea and coffee brewing methods, resulting in the growing momentum of the single-serve pods worldwide. In February 2012, GMCR released the premium Keurig Vue system, which is the only single cup brewing system in the marketplace with technology that allows users to customise the strength, size and temperature of each beverage. Prior to 2012, many would say that GMCR had an undisputable advantage in the North American single-serve market. It seemed there was no stopping the K-Cup revolution – until the months leading up to 16 September 2012. On this day, the patents for the ingenious little cup was set to expire, meaning that any company could design a capsule that could fit into the Keurig system. From a layman’s perspective, the collaborative efforts of Sylvan along with Peter Dragone and Dick Sweeney – who together came up with the prototypes and business plan for the Keurig brewers and K-Cup packs – were about to be challenged. But from GMCR’s perspective, the success of the Keurig system was not reliant on any patent, but rather the quality of the product. “We have long built the business to be successful without the benefit of patents – like any successful consumer product goods company,” she says. Despite this, there was speculation around whether the hot beverage empire would survive amid the soon-to-emerge competition. With wavering share prices, at one point dropping by more than half the previous year’s value, and inconsistent forecasts by analysts, it was difficult to predict how strong they would come out after what some referred to as “GMCR’s doomsday”. But the dust settled shortly after this fateful day, revealing a largely unaffected GMCR – still leading in the single-serve market.  DuLong explains that there was certainly a need to prepare leading up to the patent expiration. “We were thorough in planning for and examining the potential impact, anticipating for some time that unlicensed brands and/or manufacturers would look to take some share of single-serve pack sales for Keurig brewers post the patent expiry,” she says. DuLong says they were confident, however, that they’d stand the test of competition. “We believed and articulated that we would continue to be the leader in single-serve beverages for several reasons,” she says. “Including our belief in the strength of our broad, licensed brand offering, our significant manufacturing expertise; our unique position to continue to expand consumer choice within the system, and our broad and growing intellectual property portfolio – all of which will continue to offer important protections against non-licensed single-serve packs.” For a company that’s typified by ongoing innovation and a record of adding new, enviable patents to the mix, the patent expiration ultimately did not pose much of a threat. But this needed to be communicated to the public. “We communicated with our stakeholders around why we were confident heading towards the patent expiration,” DuLong says. “We also continued to pursue opportunities that added strength to our leadership position, including introducing new brewer innovations, like our Vue and Rivo brewer models, and expanding options in our brand portfolio through new strategic partnerships.” These partnerships include Eight O’Clock Coffee, Snapple and Costco’s Kirkland Signature brand and included their own beverage varieties like Vitamin Burst and Lemonade by Green Mountain Naturals. “It turns out that it wasn’t really the patent that was protecting the strength of the Keurig system. The patent just gave us a head start, which is exactly what patents are intended to do, ” DuLong says. She reinforces that the consumers’ love and passion for their product was a major factor in the post-patent success. “The real protection has been in a number of areas. The passion consumers have about Keurig and the brands in the system; offering a better product; our mass and scale, which gives us a better cost structure; the ability to partner successfully with strong brand partners; and a broad distribution system that took years to build,” she says. So what threat does potential competition now pose? “We believe that achieving the scale, cost and quality advantages that we enjoy today is not easy for others to replicate,” DuLong says. “As a trusted leader in the coffee-maker category, GMCR has earned the reputation for being customer-focused, smart and reliable. The Keurig brand has come to stand for excellence in every aspect of the coffee experience. Additionally, the Keurig Brewed seal of approval on our authorised K-Cup packs was developed to safeguard this reputation and help it grow.” As a part of its strategy to lead the single-serve market among growing competitors using its patent, GMCR has partnered with companies who are technically their coffee competitors, such as Folgers and Dunkin’ Donuts. These partnerships have led to a choice of more than 30 brands and 250 varieties of coffee, cocoa, teas and other specialty beverages. “The ability to identify and build mutually beneficial relationships with partners with whom we also compete is simply part of GMCR’s DNA – and it’s a real advantage,” DuLong says. GMCR’s success is confirmed by analysts all over the US, including Senior Analyst for Williams Capital Group, Marc Riddick. He says sales of the K-Cup packs have remained strong after the patent expiration, because customers have no reason to change. “Customers are satisfied with the product; as a result GMCR’s sales were better than some people thought they would be,” Riddick says. “Now it’s just a matter of what brands they choose to embrace.” He also says the appointment of new CEO Brian Kelley in December 2012 should help. “GMCR also had a change of leadership taking them in a new direction which was positive,” he says. “Overall, they have a very high customer satisfaction.” The American economy’s woes similarly don’t seem to be having much of an effect on GMCR’s success. While the K-Cup packs certainly bring convenience, on average they cost twice as much as a traditional cup of coffee. “Even though they cost more per serving, people don’t have to clean up any mess so it’s not a function of price but it’s a function of value to the consumer,” Riddick says. “The market share will continue to fall in the direction of single-serve mainly because that’s where a lot of the offerings are. As long as that continues to be the case, the market share will remain stronger than traditional coffee.” The question arises that with the increasing conversion to the single-serve revolution, should traditional coffee traders should be worried or seeking out their own single-serve delivery? “The single-serve delivery approach works very well for some people, but I don’t know if it’s something that everybody has to do,” Riddick says. “Even though it makes sense for lot of people, I don’t think it necessarily makes sense for everyone. You can still be competitive without embracing the K-Cup, so long as you’re true to whatever your brand is.” Responding in this fashion, and merging the two worlds of traditional and single serve, is German company Melitta. While still offering an array of coffee beans, traditional coffee machines, and their own coffee pods in the US, Melitta also plans to release its own Keurig-compatible coffee pod, the UpShot. The company released the JavaJig earlier this year, a single-serve Melitta filter system, allowing users to fill the pod with fresh coffee and then reuse it – an economical and environmentally friendly option. “We are extremely excited to offer consumers who own single-serve machines a Melitta product that we are very proud of and know they will enjoy, ” says Chris Hillman, Melitta’s Vice President of Marketing. “Our pod offerings are all about providing choices to our customers – the same great Melitta taste across the board.” So what’s left for GMCR to accomplish? DuLong says that with the leadership of their new CEO, the company would like to dramatically improve their in-store presence, sharpen their marketing efforts and ultimately expand beyond the US and Canadian markets. The company recently appointed Gérard Geoffroin – former head of GMCR’s Canadian Division – as President International Business Development to help on this front. “We know we have a significant opportunity to grow in current channels away-from-home, in new categories, with new brewers’ technologies, and in new geographies. But we must prioritise them and execute flawlessly the ones we choose,” DuLong says. It sounds like they have their work cut out for them, and fortunately a good brew to keep them inspired along the way.