Restoring Single Serve Equilibrium
Keurig Green Mountain headquarters in Burlington, Mass
Equilibrium in a market as fluid as global coffee is fleeting: single-serve was the lone exception.
Since 1986 Nespresso has dominated the European single-serve market with multiple brewers and espresso capsules that earned the company $5 billion last year. Rival Keurig Green Mountain practically owns the North American single-serve market with an 89% share, also earning $5 billion. Pods accounted for 34% of total coffee sales in 2014, according to Euromonitor. That’s 134,000% growth since 2000.
The segment seemed quite stable during the past decade. In Western Europe Nespresso held a dominate share. In North America it was Keurig. There were skirmishes in their respective fiefdoms. Keurig made limited headway introducing brewers to offices in the UK while Nespresso opened Nespresso boutiques in the US and Canada featuring a brewer that makes 8oz American-style coffee — but for the most part these competitors focused largely on keeping up with rapid growth in their home markets.
All that changed in December when JAB Holdings made a surprise offer of $92 per share for publicly held Keurig. The 77.9% premium totaled $13.9 billion. In an instant the Jacobs Douwe Egberts (JDE) partnership between JAB Holdings and Mondelez International disrupted the decade-long single-serve equilibrium for the world’s major coffee brands. Keurig’s stock was falling, which suggests the premium as a strategic acquisition since 2015 marked the end of Keurig’s high-flying sales.
In February 2106 Keurig reported unit sales of brewers were down 7% — the sixth consecutive quarter drop. The company reported a $60.3 million decrease in brewers and accessory sales compounded by continuing declines in sales of its K-Cups beginning that began in mid-2015. Sales slipped $62.2 million for the quarter ending January.
Meanwhile a less dramatic development is quietly undermined the thriving private label capsule manufacturing segment as mid-sized roasters and coffee chains begin to fill and pack their own capsules using high-capacity equipment that sells for under $7,000.
North Americans are far from discarding the format. Keurig estimates there are 22.9 million active brewers with many more non-licensed models. Household penetration is greater than one third (rising to 40% in Canada and in several countries in Western Europe). The pace has slowed however and the market is in flux.
Expect 2016 to be a tumultuous year. Since Green Mountain Coffee Roasters acquired Keurig in 2004 and with the launch of Nespresso’s Dulce Gusto brand in 2006, the trajectory of single-serve has been stratospheric. Will it fall off the cliff? Not likely.
Single-serve has single-handedly driven growth in coffee consumption, according to the National Coffee Association, citing data from StudyLogic. In the closing months of 2015 American coffee drinkers were consuming 2 billion single-serve cups a month, an increase in December 2015 of 13.2% compared 2014. While traditional methods of preparation are in decline (traditional, instant and French press) single-serve is more popular than ever in the home, at work, in foodservice and even fine restaurants.
Acquiring Douwe Egberts, partnering with Mondelez International (Jacobs), and the purchase of Keurig – combined with the acquisition of retail coffee chains Peet’s, Caribou Coffee, Intelligentsia, and Stumptown Coffee Roasters – makes JAB Holdings the world’s largest pure-play coffee business and the dominate single-serve machine and capsule manufacturer (Keurig-Senseo-Tassimo). Euromonitor estimates JDE’s global market share at 19.7%. Nestle/Nespresso holds 22.3% .
What happens next?
Ross Colbert, global strategist-beverages for Rabobank, visited Keurig executives soon after the acquisition. “I expect the expansion of K-Cups will likely focus on the high per capita coffee markets in Northern Europe (Nordics-UK to start) where a ‘long coffee’ is consumed more often,” said Colbert. “Eventually Keurig will migrate K-cups to Brazil and other select markets,” he said.
“I am not sure that everyone has totally digested what has happened and how it will affect them,” writes Pod Pack International president Tom Martin. Pod Pack, located in Baton Rouge, Louisiana, manufactures non-licensed Keurig-compatible capsules and filter paper pods. “It is an interesting situation as JAB somewhat controls the single cup future for the big US brands. As the existing Keurig distribution agreements expire I expect there will be many opportunities for the non-Keurig co-packers,” he said.
It is unlikely major brands will abandon Keurig as the margin pool for licensed partners is very appealing. Keurig’s e-retail reach adds essential incremental volume for the smaller national brands and is significant enough to entice Folgers, Maxwell House and especially Starbucks, the segment’s market leader.
“Overnight these brands are doing business with a worldwide competitor that definitely has its eye on building a significant US market. JAB, which has spent nearly $30 billion acquiring coffee companies in the past two years certainly has the financial wherewithal to do it. I wonder how comfortable these brands are about supporting this new major competitor?” asks Martin.
“JAB took over Keurig at a pretty hefty price by all measurements,” adds Michael Ishayik, president of Intelligent Blends, LP in San Diego. “I agree with the consensus that Starbucks will sure be leery of pumping up JAB’s bank accounts so that Peets can further compete with Starbucks on every front,” he said.
“We ultimately hope that with JAB at the wheel Keurig will focus on expanding and growing the single-serve market versus aggressively defending market share at the expense of the industry,” he observes.
“Private equity tends to be more disciplined and want a return on investment. The only way to do that is grow the market and lead the industry with the one common goal: to put a single serve machine in every US household. The old adage rings true, a rising tide lifts all boats,” he said.
In May 2014 the Keurig-owned K-Cup brands together for the first time outsold Nespresso globally and that was not counting the vast portfolio of licensed brands that includes Starbucks. A Nespresso spokesperson said the company does not comment on competitors but clearly the segment is now a two horse race — Keurig and Nespresso.
Tassimo was Europe’s fastest growing single-serve system but faltered in 2012 when it was forced to recall 2 million brewers making it likely JAB will choose Keurig as its European capsule format.
Pod Pack national sales manager Dan Ragan predicts single serve will continue to grow 10% annually until 2020.
How will Keurig extend its reach globally?
Brewers are key. Machine sales plummeted 22% in the first three months of 2015 following the introduction of $189 Keurig 2.0 in 2014. It is the latest in a line of disappointing machines that includes the ill-fated Vue and the Keurig Kold.
Missteps invited KitchenAid, BUNN and Remington and numerous appliance manufacturers into the segment with lower priced and more versatile home brewers. Following the acquisition an investment in Keurig’s brewers will likely result in better researched designs.
JDE’s Senseo is a single-serve filter pod brewer that has a strong global presence and appeals to a fundamentally different consumer tier. Filter pads are viewed as more environmentally friendly and less expensive way to achieve coffee convenience.
Filter pods are also likely to get a boost as JAB repositions the Senseo platform.
Foodservice will play a large part in the growth of the single-serve market in the US, according to Ragan, with the majority choosing filter pods (1 billion units by 2020). The acquisition does not bode well for JDE’s Tassimo brewing system.
“Tassimo will be out by 2025, maybe sooner,” he said.