1 of 4
Big Retailer Buy-In Shields Keurig 2.0
Keurig brewers stacked to the ceiling at Bed Bath & Beyond.
2 of 4
Big Retailer Buy-In Shields Keurig 2.0
Keurig licensed roasters moved quickly to clear out any 1.0 portion-pack inventory but homeowners had large stocks in their pantries.
3 of 4
Big Retailer Buy-In Shields Keurig 2.0
Non-lincensed capsules that work in Keurig’s 2.0 brewer are now available in stores.
4 of 4
Big Retailer Buy-In Shields Keurig 2.0
Keurig makes its money selling portion packs, earning $3.6 billion in 2014. Brewers by comparison are low margin, earning $822 million, down 1%.
The outcry continued through the peak holiday sales months but Keurig Green Mountain weathered the criticism of customers, content in the knowledge its “lock out” strategy had successfully convinced hold-out coffee roasters to buy licenses to produce the new 2.0 capsules.
Big Retailer Buy-In Shields Keurig 2.0
SuperValu licensed its private label.
Retailers bought in big, ordering millions of the new machines for the fall launch. This forced the hand of competitive coffee brands hoping to maintain retail distribution. There are now so many competing single-cup brewers vying for kitchen space that it is too early to know whether retailer’s investment in the latest carafe brewers will be profitable. Keurig is doing just fine, reporting $4.7 billion in sales.
Keurig continues to dominate the segment, selling 9.8 billion portion packs and 10.4 million of its own brewers. Licensed partners like Cuisinart sold another 500,000 through Sept. 27. Portion pack sales grew 22% to $949 million in the latest quarter.
Eight months ago private-label capsule sales were approaching 20% market share. It is now clear the potential for runaway growth of non-licensed coffee portion packs has been curtailed at 10% market share.
Convincing coffee giant Kraft Foods Group to license leading brands Maxwell House, Gevalia, and Yuban added 6% market share to the licensed segment. Add to this former private-label retailers Target and BJ’s Wholesale Club, Peet’s Coffee & Tea, grocers Meijer, and the 3,336-store SuperValu retail and distribution chain.
Keurig and its partners now supply 89% of capsule value in a market expected to reach 12 billion capsules in 2015. Capsule sales currently exceed 28% of the entire $11.2 billion retail coffee market by value, according to Packaged Facts.
While all of the major national roasters are now licensed, non-licensed private-label remains strong in grocery chains including Kroger and Safeway. Private label is also doing well in the foodservice segment at national chains such as Panera Bread whose capsules are supplied by Distant Lands coffee.
Non-licensed capsules typically sell for 25-40% less than licensed K-Cups. Restaurants, resorts, and convenience stores are offering single-cup options along with small coffee chains and custom roasters. The latter, led by TreeHouse Foods, Rogers Family Coffee, and Canada’s Club Coffee as well as Ontario-based Mother Parker’s quickly broke the Keurig code and began offering capsules with lids printed with infrared ink that will work in the 2.0 machines.
During the past six months Keurig-licensed selections increased to 400 beverage varieties offered by 60 brands.
Keurig prevailed against big-name private-label competitors like Kraft but the cost in goodwill is high in the 20 million kitchens and offices that stockpiled portion packs that only work in first-generation brewers.
Customers complain
Hundreds of consumers in product reviews on influential websites, especially Amazon, also voiced their anger at Keurig’s decision to no longer offer “My Cup” refillable capsules.
Instead of brewing their morning cup of coffee, users inserting any of the 6 billion capsules manufactured before mid-year saw an “Oops” message directing them to a website. There they were advised that Keurig was ensuring “the system delivers on the promise of excellent quality beverages produced simply and consistently every brew every time.”
In fact the new brewers are less versatile than the last generation 1.0 machines and in the short term, 2.0 offers fewer coffee selections.
Many resent the lock out. Hostile reviews and YouTube videos offer detailed instructions on how to defeat the infrared reader mounted above the capsule. One popular technique is to remove the lid from a licensed cup and tape it to the old capsule before inserting it into the new brewer.
The bad buzz led Keurig’s consumer relations team to quickly disable the comment board on its own website. Reviews were later restored averaging 4 stars by December. Amazon’s 704 reviews averaged 2 stars. The company was reportedly surprised at the amount of 1.0 inventory in kitchen pantries and initially offered to send new version K-Cups to compensate for the inconvenience. That proved expensive and brewer owners were later given discount codes to get a free pack of the 2.0 capsules. Customers purchasing a Keurig for the first time were less critical of the 2.0 brewers.
The new portion packs are heavily discounted as well with $10 off and free shipping for orders of five boxes or more.
The professional reviewers at CNET offered this assessment: “The Keurig K500 is a fine single- and large-serving coffeemaker in its own right, but it’s difficult to recommend. New buyers can do much better with a brewer that’s more flexible and less expensive, like the Bunn MyCafe MCU. If you’re a Keurig loyalist who already owns a brewer, upgrading to Keurig 2.0 will only leave you with fewer coffee brands to choose from. Unless being able to brew an entire pot is worth it to you, you’re almost certainly better off saving your money and sticking with what you already have.”
In November Remington introduced the iCoffee Opus single-serve brewer at Bed Bath & Beyond locations. It was packaged with non-licensed Tim Hortons coffee in RealCup brand capsules manufactured by Mother Parkers.
Retailers report brisk sales of Bunn’s MyCafe and the much less expensive K-Cup compatible Hamilton Beach 2-way FlexBrew ($65 at Wal-Mart). Al Rankin, chairman and c.e.o. at NACCO, which owns Hamilton Beach, said that he expects 2015 revenues and net income from these brewers “to increase over 2014 due to increased product placements and sales volumes.” In his most recent quarterly earnings call Rankin cautioned that “sales volumes in the middle market portion of the US small kitchen appliance market in which with Hamilton Beach participates, are projected to grow only moderately in the remainder of the year.”
The number of competing brewers, including those with a carafe option and the “two-star” ratings that predominate on consumer websites likely discouraged Keurig owners from upgrading. Price is another consideration. The Keurig 2.0 K350 lists at $149.99 (discounted to $118 at Wal-Mart). All three new brewers cost $20 to $30 more than last year’s brewers, a 17% hike compounded by a big increase in the price of portion packs. Wal-Mart advertises 18-count Folgers gourmet flavors for $15.77. Keurig sold 5 million brewers in the closing months of 2013. Brewer sales are up 6% in 2014 but will not approach that holiday blow out this year.
Changing retail landscape
Coffee sales currently face a stiff headwind from a 9-10% retail price increase due to the steep rise in green coffee prices. Folgers experienced a 20% decrease in volume with a 16% decline in profits according to c.e.o. Richard Smucker.
“Our rapid ascent of coffee prices to reflect higher green coffee costs took its toll on volume,” Smucker told analysts. He predicted coffee volume trends will improve but the pricing impact of higher green coffee costs will continue through the remainder of the fiscal year.
“We do not believe there has been a fundamental change to the at-home coffee category. However, our teams will continue to focus on tactical opportunities to address the current market environment,” he said in a press release.
The National Coffee Association (NCA) releases a monthly “coffee market consumption report” compiled by StudyLogic that shows in-home consumption up 1.7% in October with at-work and foodservice servings up 4%. Single-serve registered a strong 15.9% growth compared to October 2013. All other retail coffee categories show declines, especially instant and ground roast—evidence of how radically the retail landscape has changed.
Sales of capsules in multi-outlet stores are nearing $3 billion exceeding sales in traditional grocery stores by two fold. As of June JM Smucker’s share of the total coffee market was 29% and slipping. Keurig is gaining at 19% with Kraft ranked third at 15%, according to IRI. Market share held by Starbucks accounts for 12% by value but regardless of brand, consumer loyalty is tenuous.
“At least half of customers are switching between three or more brands with K-Cup customers exhibiting lower brand loyalty than instant or whole/ground buyers,” according to Rabobank’s Ross Colbert, who presented his observations in September at the COTECA 2014 conference in Hamburg, Germany.
“Whole bean volume is slipping as consumers choose more convenient brewing options,” he said. “The fight for more shelf space has intensified due to new single-serve packages, brand offerings and package formats. The bag segment is likely to be further impacted by expanded distribution of McCafe premium coffee (Kraft).”
Changing attitudes
In October at the NCA Coffee Summit in Boston, consultant and former Keurig executive Don Holly predicted single cup brewers will eventually find their way into 50% of US households (up from 15% according to last year’s National Coffee Drinking Trends survey).
Analyst Judy Hong at Goldman Sachs forecasts Keurig sales will grow at a compounded annual rate of 29.6%. She estimates household penetration of brewers at 23% and predicts this will double to 50% by 2020.
Holly estimated the single-cup segment’s growth potential at $8 to $9 billion.
Single-serve has caused a shift in consumer attitudes, according to Holly. Citing a new NCA report The Changing Coffee Market: Single Cup & Preparation Methods, Holly said that the owners of single-cup brewers are more likely to report drinking coffee daily. Seventy percent of single-cup owners say they drank coffee yesterday, compared with 62% among all respondents.
Those who own single-cup brewers also appear to prefer gourmet coffee varieties, which other NCA data shows to be its own growth phenomenon. Daily gourmet coffee beverage consumption has grown by nine points since 2011 while non-gourmet traditional coffee has fallen by four.
NCA’s report reveals that 61% of consumers rate the quality of single-cup coffee as “excellent” or “good,” up significantly from 26% reported in 2007. At the same time, those who rated single-cup coffee as “fair” or “poor” dropped by a third, from 32% in 2007 to just 12% in 2014.
Holly told summit attendees: “while convenience is often paramount in the eyes of today’s time-harried consumers, they also demand consistency in the cup and variety, so that quality becomes hard to separate from other aspects of the single-cup experience.” He speculated that innovation in the segment will bring consumers currently unavailable advantages, like advanced extraction of coffee solubles into the cup.