Coffee for One

by KJ Fallon

  Gradually, over the years, grocery store distribution has become the key channel for Keurig K-Cups. “It was a different kind of approach toward the marketplace,” added Lazaris, “and as a startup and later on as part of Green Mountain, a small company, one has to be resourceful, and we were.”

  Fast forward briefly to 2015 and Keurig Green Mountain is bought by an investor consortium led by JAB Holdings, which also own Peet’s Coffee, Caribou Coffee, Stumptown Coffee Roasters, and coffee giant Jacobs Douwe Egberts, as well as a majority stake in Intelligentsia Coffee. JAB Holdings manages the money of the Reimann family, one of the world’s richest families. 21, 22

  CHAPTER 7

  K-Cup, Etcetera

  The My K-Cup Option

  One product development and go-to market strategy was to connect the coffees that consumers wanted with the Keurig. When Keurig launched the retail version of their brewer, they surveyed customers to find out what they wanted in a single-serve brewer. According to Lazaris, they found out early on with their studies that sometimes people wanted a variety or brand of coffee that wasn’t being offered in a K-Cup. A couple could be interested in buying a Keurig brewer for their home, but one half of the couple really had to have their morning Starbucks, for example, while the other couldn’t live without a morning cup of Dunkin’ Donuts coffee.1

  Keurig featured numerous brands of coffee, including at least one gourmet brand, on the brewer boxes. They were always adding brands in the beginning so it was important to have at least one recognizable quality brand on the box that people all over the country would know.

  When Keurig launched, they had about a dozen brands. Keurig started to hear objections from people that their reason for not buying a brewer was because they did not see their favorite brand on the box. “That’s when we internally developed the My K-Cup,” Lazaris said. “My K-Cup is a two-part piece of plastic that lets you put your own coffee in. You can pop the K-Cup holder out, put the My K-Cup in, brew your own coffee.”

  They did some market testing before they launched the My K-Cup because they wanted to find out how often people would use it. They found that people did not use it very often. When people had the My K-Cup, they liked it and knew how to use it, but fundamentally they greatly preferred the convenience of putting a K-Cup in the brewer and pressing the button.2

  But, just the same, Lazaris said they felt pretty confident that if they merchandised the My K-Cup, either with the brewer or separately, people would understand that they weren’t locked into the Keurig system and they could use any coffee they wanted. Secondly, it removed a significant hesitation to buying Keurig, and third, he said, “Once that person was in Keurig, the person in the couple who wanted to use their own coffee, after a little bit of exploration, which is why we provided assortment packs, would find another brand that was close enough, and the convenience factor trumped everything else.”

  The My K-Cup helped Keurig sell a lot of brewers, according to Lazaris, and they developed a strong relationship with their customers, who did a lot of advertising by word of mouth.3 Customers liked being able to offer friends who came to dinner choices of coffees and teas.

  And the My K-Cup offered a more environmentally friendly way to brew coffee for one.

  An Analyst’s View of Keurig in the Early Years

  Scott Van Winkle, who followed Keurig when he was an analyst with Canaccord Genuity, said that in the early days, Keurig was one of the few if not the only publicly traded company like it. There were, of course, Nespresso as a part of Nestlé, Kraft and its Tassimo, and Starbucks, which launched Verismo, their own product, but there wasn’t really a publicly traded company that competed with Keurig.4

  “I think any time you have the success that they had, I mean really changing how consumers made coffee,” Van Winkle explained, “not just taking share from other coffee makers, but literally changing the way consumers make coffee, and you build this installed base of users, you’re going to get challenged . . .” Van Winkle thinks that it’s natural that any company that dominates a market like Keurig is going to attract competition that is going to try and go around them in one way or another. Keurig was building a business and signing up partners in the early days, like Green Mountain Coffee, Timothy’s World Coffee, and Diedrich Coffee for a while before Green Mountain bought them in 2009.5

  Keurig would sign up coffee partners and have them do a lot of the marketing from the standpoint of their brands, putting up capital for building packaging facilities. Tying up partnerships ultimately became the best defense of their system and it was so successful that they eventually signed Folgers, Kraft, Dunkin’ Donuts, and Starbucks.

  While there was debate on Wall Street about the competition that Keurig would generate,6 Van Winkle pointed out that when you’ve partnered with the brands that dominate the coffee industry, you’ve reduced the risk of your intellectual property not holding up.

  Regarding entering the consumer market, Van Winkle said, “I don’t think at that point I had any expectation that the consumer piece was going to be significant. It was promising, it was an opportunity, but it hadn’t been realized.”

  There were, of course, lots of challenges to Keurig and its achievement as often happens when a product is that successful. But Keurig kept improving the system, and the quality of the coffee started to improve, and the advancements proved the naysayers on Wall Street who said that “the coffee wasn’t good enough” or “the coffee wasn’t hot enough,” wrong. There was, he added, the cost of the low-end machine. The thinking was that “Consumers aren’t going to do this when they’re used to spending twenty dollars for a Mr. Coffee,” he remembered.7

  But the practicality just could not be beat. It changed the game. In the early days there were lots of issues to overcome, Van Winkle pointed out, like price and consistency of taste—it’s different with a slow-drip coffeemaker versus brewing it in forty seconds: “The simple rule is the more time the hot water spends on the coffee grounds, the more it tastes like coffee. So at the beginning I would say it was more perception that they couldn’t overcome the issues, and then in each subsequent improvement, it became dramatically better and today the quality of the coffee coming out of one of those machines is pretty darn good.”

  About the 2.0 Controversy

  Van Winkle thinks that the initial plan for the 2.0 Keurig brewer was to have more interactivity between the machine and the cup. The idea was that it would benefit the consumer since the he or she could brew the coffee as needed for each K-Cup. Maybe one particular coffee needed to be brewed for forty-five seconds rather than thirty-five. There would be real interactivity, he said, and that was the argument for the consumer.8

  He does not think that the 2.0, from the standpoint of the company, was an effort to defend their market share of the pods compatible with the machine. The reality of the 2.0 was that there was just some coloring on the top of the label that the machine read, and as soon as that was figured out, there were hacks to circumvent it, on YouTube and the like, showing how to remove the top of this cup and glue it on the top of another, and so on, or glue it to the bottom of the machine reader itself and just insert any cup you want.9

  In reality, he said, Keurig could have done more with the 2.0 from the standpoint of interactivity and keeping out competition.10 But many consumers did not see it that way and neither did some other coffee purveyors, as we see later.

  The Secret to Keurig’s Success

  Keurig’s success, according to Van Winkle, all starts with the consumer solution. He stressed that it was a no-brainer. A large portion of the US population drinks coffee. Coffee is very important to them. “Coffee is brewed at home,” he said, “this isn’t like a SodaStream where I’m going to make soda at home or I can buy it in a can. I can’t buy hot coffee at the grocery store and drink it every two weeks. I have to make it at home.”

  Everyone who makes coffee needs an appliance. That meant that a new coffee brewer would be replacing a machine that somebod
y already had. “I think the last time I saw the numbers,” Van Winkle said, “there were ninety million homes with a coffee maker, and there were twenty million coffee makers sold a year. So basically the math is every four and a half years somebody’s throwing away their coffee maker and buying a new one.”

  So, there was a replacement cycle the brewer maker had to sell into. Everybody likely already had some kind of machine or equipment to make coffee. A coffeemaker was an essential appliance that was used every day at least once a day. The coffeemaker was not like a big bulky food processor or stand mixer that would take up precious real estate on the kitchen counter. A new coffee brewer would replace something that was already being heavily used.11 And the Keurig, summed up Van Winkle, “was dramatically more convenient.”

  The Keurig had a lot of advantages and it was a solution for a lot of people. The time saving and the accessibility really made a difference. Van Winkle observed that while a lot of people might set their drip coffeemaker to start brewing at a certain time in the morning, most don’t.12 “Being able to make a cup of coffee in thirty to forty seconds was a significant improvement,” he said. “The brands benefited in the long run because there was more sampling. Rather than buying a pound of coffee, you could buy eight cups at a time.” More coffee drinkers got to experience an increasing number of brands.

  For instance, now Twinings of London, the venerable three hundred-year-old tea company, offers coffee in K-Cups (in addition to tea K-Cups, of course). Starbucks also joined Keurig and, after parting ways with Tassimo, Lavazza, an Italian coffee brand, is also available in K-Cups.

  In addition to the brand selection, the business model that Keurig deployed allowed them to be successful. Normally, when you try and create an entire new consumer product it can be very expensive. “The model that Keurig started and then Green Mountain continued after they acquired Keurig was really not to have to deploy any capital into the manufacturing of the machines. They outsource the manufacturing to suppliers in China. You obviously have to carry inventory. But you really weren’t deploying any capital against building the machines . . .” They didn’t have to make money on the machines, so they could sell them at a price point where they delivered a very attractive and quality product at a price that was appealing to consumers.13

  The big advantage Keurig had over its competition was that the manufacturers of competing machines had to make a profit on the machine.14 With household appliances, reasoned Van Winkle, usually the heavier they are, the more expensive they are. “A really inexpensive plastic coffee maker you can pick up at Walmart for ten dollars is a lot different than a Cuisinart Grind & Brew that you pick up at Bed, Bath, & Beyond for one hundred and fifty dollars. So the model allowed them to get a good price point with a good quality machine which allowed them to build their household penetration.”

  By initially using third-party partners, brands that were going to spend their own money to build manufacturing, Keurig avoided needing to make back their money on the brewers. “Now, ultimately,” Van Winkle said, “Green Mountain acquire[d] all of the licensees, acquire[d] Keurig, when they [were] the ones putting all the capital behind K-Cup manufacturing facilities and K-Cup manufacturing equipment, but the initial Keurig model was almost an outsourced model in all respects except for marketing and R & D.” Keurig used a good business model with a good consumer solution and that is what made it.15 It eventually became very obvious that the quality of the coffee coming out of the Keurig K-Cup machines was as good as you were getting elsewhere. And you could brew it right there in your kitchen in a matter of seconds.

  The Emergence or Escalation of Other Single-Serve Brands

  Keurig and the K-Cup may be the most well-known, especially in the United States, but what about the other single-serve coffee options mentioned before? Although its burgeoning growth of the past decades has slowed,16 Nespresso is still the leading brand in Europe, as of this writing, and has been making inroads in the United States and Canada. In 2014, Nespresso introduced their VertuoLine System, specifically designed to cater to the American preferences, as Nespresso says on their website:17

  VertuoLine system [is] the first Nespresso machine that brews both American style large-cup coffee and authentic espresso. Launched exclusively in the US and Canada, VertuoLine directly appeals to large-cup coffee preference in North America. In the same way that it pioneered the premium portioned coffee segment in Europe more than 25 years ago, Nespresso aims to revolutionize the large-cup coffee segment in North America.18

  Nespresso has figured out how to charm the serious single-serve coffee lover. In 2006, George Clooney became the spokesperson for Nespresso and appeared in ads for the high-end espresso machine. Some of those ads also featured Danny DeVito and John Malkovich. However, the ads didn’t appear in the United States until 2015.

  The single-serve market is getting somewhat crowded and each brand wants to capture coffee drinkers who crave the single-serve option. In the United States, Keurig has about an 85 percent share of the single-serve capsule market and Nespresso, with the launch of its VertuoLine, is hoping to garner more than the 4 percent share of the US coffee capsule market it had as of 2013.19 It is a safe bet that since JAB’s takeover of Keurig, that brand will be looking at increasing its market share in Europe. JAB already has the biggest piece of the coffee capsule market on the planet, and that is where the growth and the money are.20 Senseo, the single-serve brewer that uses coffee pods that contain no plastic, using little coffee-filled pillows, has been and is more popular in Europe than it is stateside, with a 10 percent global share of the single-serve market, just behind Nespresso with an 11 percent global market share, as of 2013.21, 22

  Nestlé released its Nescafe Dolce Gusto in 2006 in Europe, which is a more modestly priced alternative to its Nespresso. While some see this as Nestlé challenging itself,23 it seems like a smart way to hedge its bets in the single-serve marketplace. While Nestlé’s Nespresso’s European market share has fallen from 2010 to 2015, Nestlé’s Dolce Gusto has risen in that time period.

  Tassimo joined the caffeine fray in 2004 in France. Like other single-serve coffee companies, Tassimo was involved in multiple changing coffee-partner scenarios over the years. Ethical Coffee Company came into being in 2008 under the guidance of Nestlé’s Nespresso’s former boss, Jean Paul Gaillard. Ethical, as its name might imply, uses biodegradable pods.

  With single-serve coffee, there is no “Can’t we all just get along?” Keeping up with who owns what can be very confusing and requires lots of . . . coffee. Which leads to disagreements.

  CHAPTER 8

  Turf Wars: Keep Your Pod Out of My Brewer

  It’s just a bit of coffee in a little pod that goes into a brewer, so how many different ways can this be done? Apparently, many. Hence, skirmishes aplenty. The coffee pods that work in one brewer will often not work in another. And, depending upon the point of view, that’s just fine. Or not.

  It takes years of research, development, and money to make a new product, so can you blame a company for trying to hold onto all of the profits for as long as it can? After all, as with any new product, it is the original company that spends the time and resources to come up with the idea. As with pharmaceutical research, the ability to keep the profits to themselves through patents for several years makes the research pay off. Then other companies can follow and improve on or change the idea of the original. The original company then figures out a way to turn things back around by producing a slightly different design of the brewer or a host of different types of pods. Problems can arise, though, when a company changes the design of its brewer to ensure that only its own pods will work in their brewers. And there is, of course, the matter of patent infringement.

  Of course, the maker of a particular coffee brewer, say, Company A, would want consumers to buy the pods made by Company A to use in Company A’s brewer. That is where most of the profits in single serve are. But consumers want to make their own choices. And Company B wo
uld want its coffee pods or capsules to be compatible in Company A’s brewer as well as Company B’s, or Company C’s, and so on.

  Things can get very dicey when patents expire or are about to, so it stands to reason that a company would want to make as much profit as it can before its designs, mechanicals, and processes are no longer proprietary.

  Since Nespresso and Keurig are the biggest players in the single-serve market in their respective main marketplaces, it is not surprising that these two companies have had to stand up for their products more than a few times. Here are just some of the examples of single-serve coffee brouhaha:

  January 2007—Keurig filed a patent infringement lawsuit against Kraft that alleged Kraft’s Tassimo T-Discs infringed on one of Keurig’s patents. Both parties agreed on a settlement in 2008.1, 2

  2011—The Rogers Family Company’s Rogers Family Coffee came out with its OneCup single-serve coffee pod that is compatible with the Keurig. Keurig sued the Rogers Family Company for design patent infringement.3

  2011—Sturm Foods, a subsidiary of Treehouse Foods, got into trouble for selling their Grove Square Coffee pods that contained mostly instant or freeze-dried coffee. The Grove Square Coffee pod looked like a K-Cup but there was no filter inside the cup. Keurig still had a patent for the design of the filter inside the K-Cup, but Sturm Foods came out with their version of the K-Cup before Keurig’s patent expired. The suit snowballed into a class action that was revived over the years and involved people from at least eight states.4, 5, 6, 7

  2012—Coffee drinkers take their coffee very seriously. A lot of people bought Kraft’s Tassimo single-serve brewers because they loved that Starbucks coffee was available in Tassimo T-Discs and they could brew their beloved Starbucks at home. These folks were pretty angry when Starbucks was no longer available in the Tassimo Brewer’s T-Discs, and Keurig began offering Starbucks in their K-Cups instead (the two systems are not compatible).8, 9 A class action false advertising lawsuit was filed against both Kraft and Starbucks for allegedly continuing to promise Tassimo coffee brewing system buyers that Starbucks cups would be available when Starbucks moved over to the Keurig system.10, 11 The suit, however, was denied certification12 in 2014 and was dismissed in 2016. Still, it shows you how intense coffee drinkers are about their coffee.13