By Dan Bolton
Everything that rises eventually descends and for Keurig Green Mountain that old saying applied to falling sales for their entire line of capsules, brewers and accessories this spring.
It may also chill sales of Keurig Kold, the new home soda dispenser that holds great promise for cold tea drinks. The Coca-Cola backed Kold goes on sale this fall.
Revenue from portion packs was growing at 22% last fall and Keurig Green Mountain (KGM) was still clocking a respectable 9% growth at the beginning of this year but KGM reported only 2% sales growth in the last quarter. More ominous is the 22% decline in year-over-year brewer sales.
Lessons from the gold rush
When the ambitions and resources of the California gold rush of 1849 were spent it was companies like Folger Bros. Coffee and Levi Strauss and the Union Pacific Railroad that profited. Early prospectors made it big with easy pickings but the real money was in supplying prospectors. There were 370 tons of gold recovered in the first five years after the strike, a sum worth $16 billion in today’s dollars. That is roughly the same amount that Keurig has earned since 2010 leading the rush to single-serve in the US
There are now single-serve brewers in 32 million US homes, the majority made by Keurig, but increasingly the K-Cup brewers and capsules that heralded a brewing revolution are supplied by Keurig’s competitors. Hamilton Beach, Breville, BUNN, Cuisinart, and Remington are among nine manufacturers marketing Keurig-compatible brewers that are less expensive to make and therefore less dependent on licensed brands that generate royalties from capsules. Sales of the Keurig 2.0 brewer introduced last fall are sluggish despite discounting while retailer’s report brisk sales of brewers under $100.
Capsule sales rose from $132 million in 2008 to $5 billion last year but US household penetration of the $150 to $250 brewers, now at 27% according to the National Coffee Association, appear to have plateaued as new users favor less expensive models.
Globally 29 million home brewers were sold in 2014, up 11% according to Euromonitor International, suggesting the rush for single serve riches has just begun.
Portion pack tea
Sales of tea in capsules declined for several Keurig-licensed tea companies through March but there is evidence that a large number of tea companies are finding success. These include grocery brands like Yogi Tea, restaurant and office coffee brands like Higgins & Burke, small chains like Capital Tea, and large retailers of specialty tea such as Harney & Sons.
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Tazo is doing exceptionally well in grocery and department stores with sales of its traditional line earning $43 million, up 22% in the past year. Its Zen tea line earned $17 million through March, according to IRi Infoscan which tracks sales in grocery, drug, multi-outlet department stores, and convenience stores.
Sales of Yogi Tea which include its new portion-packs in four flavors led all tea categories with 27.6% growth to $38.5 million during the 52 weeks ending March 15, according to IRi, the leading global provider of enterprise market information solutions.
Starbucks shipped 100 million coffee and tea capsules in December 2014.
Sales of the top four Keurig licensed tea capsules were $75 million with Keurig Café Escapes selling $30 million, Celestial Seasonings at $23 million, Snapple selling $11 million, and Bigelow Tea $10 million worth of tea for an average unit price of $8.72 (12-ct) or 73 cents per capsule.
IRi does not breakout sales of capsules by Unilever/Bestfoods North America, the leading brand of tea with $635 million in grocery and department store sales but assuming capsules represent 6.5% of total sales Lipton earned an estimated $41 million from its capsules.
“The pods market has tripled in value in five years,” said Euromonitor beverage analyst Howard Telford. Euromonitor estimated tea sales at 2% of the total bagged/loose leaf market in 2009, rising to 4.5% in 2012 and to 6.5% in 2014.
In 2015 that number will be closer to 10% of all bagged/loose leaf given the large amount of online sales on Amazon and through office coffee and private label brands, many of which are just entering the capsule segment.
The basics
There are two kinds of capsules: open mesh (ring or cup) and sealed capsules (generally packed in nitrogen). Tea gets stale but not as quickly as coffee. This makes the lower cost open mesh ring appealing but flavored teas will not retain their appeal unless the mesh is individually sealed in a small pouch.
The machinery to fill and pack tea is expensive. That is why blenders turn to manufacturers such as Chicago-based LBP that make billions of empty UpShot capsules that are sold by the pallet for about 15 cents each, depending on quantity ordered. Brands using UpShot include Saxbys, Melitta, and Mystic Monk.
Co-packers spend millions on equipment to fill hundreds of capsules a minute, adding 5 cents to the cost. Capsules are then nested in standard boxes to save space. Cartons hold 12, 18, or 24 K-Cups. Total cost: 30 to 55 cents per capsule including tea. Capsules sell for 65 to 95 cents, around $9 for a box of 12.
Blending for capsules
Blenders recommend 500-pound lots, enough for 28,350 (8-gram) iced tea capsules or 56,700 (4-gram) capsules used for hot tea. Inclusions must be fine with uniform density.
“Keurig’s brew cycle is 30-45 seconds which requires adjustments in cut, throw weight and even packing such as vacuum conveying instead of augers that can damage fragile leaves,” explains Jeff McIntosh, R&D at Intelligent Blends, a San Diego co-packer that fills 300 million capsules a year. One of the most important tasks is determining which filter to insert into the cup.
“Filters have a range of specialized properties. Choosing the correct material delivers the best infusion, aroma, color and flavor. We test many filter papers for particle retention properties to get the right dissolvable solids in the cup,” he said.
“The result is cups as close as possible to the bag teas people have used for years,” said McIntosh.
QTrade Teas & Herbs president Manjiv Jayakumar in Cerritos, Calif. agrees. “It is now possible to replicate existing product offerings and deliver an excellent cup,” he said. QTrade is North America’s largest supplier of organic and Fair Trade certified tea.
Twenty years ago capsule filling equipment cost millions. It was designed to produce tens of thousands of capsules per shift. Third party facilities managed product lifecycles and timing, constraining brands on product delivery to retail channels. Smaller local brands were financially unable to enter the market.
Today blenders and brands have the option of investing in equipment or partnering with regional co-packers gaining greater control over their product, delivery schedules and distribution channels. Production runs are getting shorter as a competitive advantage with minimums as low as 15,000 capsules.
“Single-serve pods represent the only category where sales have grown in supermarkets, drugstores, and other non-restaurant outlets,” according to Ric Rhinehart, president of the Specialty Coffee Association of America. “Whole-bean, ground, and jarred instant coffee sales are all flat or falling,” he said.
“Just as coffee has seen whole bean and ground coffee sales thwarted by single-cups, so, too, may the tea market see declines in bagged/loose tea—on top of existing declines in instant,” writes market research firm in its Tea and Ready-to-Drink Tea in the U.S.: Retail & Foodservice report.
“While single-cup margins are a marketer’s dream, this assumes that the particular marketer has a foot in the single-cup space—or the dream may become a nightmare,” according to Packaged Facts.