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Green Mountain Coffee Essay

Green Mountain Coffee Roasters opened as a cafe in 1981 in Vermont. They roasted their own coffee and before long, demand grew and local restaurants and inns began to order their premium roasted coffee as well. Today the Company has extensive wholesale, direct mail and e-commerce operations. Green Mountain Coffee now has a distribution facility and two production sites in Vermont, and a manufacturing and warehousing facility in Knox County, TN (GMCR.com).

GMCR’s operations are managed through two business units. The Specialty Coffee business unit produces coffee, tea and hot cocoa from its family of brands, including Tully’s Coffee, Green Mountain Coffee and Newman’s Own Organics coffee. The Keurig business unit is a leading manufacturer of gourmet single-cup brewing systems and markets its patented single-cup brewing systems for consumers at home and away-from-home. K-Cup portion packs for Keurig Single-Cup Brewers are produced by a variety of licensed brands, including Green Mountain Coffee, Starbucks, and Tully’s Coffee (GMCR.com).

Keurig, Incorporated, which became a subsidiary of GMCR in 2006, is the second business unit of Green Mountain Coffee Roasters, Inc. Keurig was launched in 1990 by Peter Dragone and John Sylvan, who asked themselves why do we brew coffee by the pot when we drink it by the cup? From this question, the concept of Keurig K-Cup portion-pack brewing was born. Keurig brewing systems employ a design that utilizes single serving pods of coffee grounds that the machine pushes hot water through and into the waiting cup. The result is a fresh, hot cup of coffee that has not been sitting in the coffee pot waiting to be poured. In 1998, after eight years of development, Keurig released an industrial-strength, single-serve machine that delivered a perfect cup of coffee or tea every time.

Keurig brewing systems employ a design that utilizes single serving pods of coffee grounds that the machine pushes hot water through and into the waiting cup. The result is a fresh, hot cup of coffee that has not been sitting in the coffee pot waiting to be poured. K-cups are offered in 249 varieties on the Keurig website. Most retail grocery stores sell several varieties of K-cups. There are two types of Keurig brewers, the K-cup system and the new Vue brewing system. There are 12 different K cup style brewers. In the spring of 2012, Keurig released a Vue brewing system that gives the consumer the ability to customize their drink by offering more cup size options and by brewing specialty beverages, such as lattes and cappuccinos. To date, there is only one model of the Vue brewing system available. Competitor Analysis

The market for single-cup coffee brewers is a fairly new one and has very few companies selling single-cup brewing systems. The market is an oligopoly, with GMCR’s Keurig holding approximately 75 percent of the US market share (Foxbusiness.com), followed by the Tassimo by Kraft, Nescafe’s Dolce Gusto and Senseo. The global leader is Nestlé’s Nespresso system with 35 percent, followed by Senseo brewers with 18 percent, and Kraft Food’s Tassimo with 8 percent. Green Mountain ranks fourth globally with almost 8 percent (Geller & Dalal, 2012). Almost all of the coffee brewers in the market are priced between $75 and $175. For around $100, the consumer has a choice of a hand full of basic brewers.

The single-cup brewers each have their own system with pods or cups that work exclusively with their machine. Most of the companies in the market make most of their profit from the sale of their coffee as opposed to their machines. Mr. Coffee released a new machine in the fall that is compatible with Keurig’s K-cups specifically to edge in on Keurig’s share of the market. It is compatible with Keurig’s K-cups and is less expensive to the consumer.

The main competitors in the mainstream single-cup coffee system market in the United States are Keurig, Tassimo, and Senseo. The less competitive players in the market are Mr. Coffee and Nescafe, while Nestlé’s Nespresso is currently the only serious contender in the high-end market in the United States.

GMCR invests significant resources and capital in engineering and research and development in order to keep Keurig’s position as the leader in the single-cup brewing market. As a result, they have a strong and growing portfolio of market-leading, proprietary technology. Keurig’s integrated engineering team drives fast and original product development in brewers, portion packs, and high-speed packaging lines; all three areas that supported Keurig’s single-cup system. The engineering team at Keurig includes mechanical, software, and nutritional science, as well as quality assurance and industrial engineering. The company’s emphasis on quality products, easy-to-use features, and innovative technologies has earned Keurig high marks in customer satisfaction.

GMCR started distribution of the new single-cup Keurig premium coffee system to office coffee service and food service providers in 1998. Keurig’s strategy to gain market share in the office market is to sell machines to distributors and encourage them to give the machines away or lease them for a small fee. The economics of the strategy works for distributors because the real profit is in selling K-Cups. Keurig sells it’s machines, both to distributors and to individual consumers, at near cost and gives the machines away or rents them cheaply to businesses, in order to secure the customer’s business. They make up the cost in less than six months just on the sales of their K-cups.

Keurig has licensed several additional coffee roasters to package gourmet coffee and teas into K-Cups, all of which pay royalties to Keurig based on the number of K-Cups shipped. In addition to offering Green Mountain Coffee and Newman’s Own Organics and Celestial Seasonings Tea brands, which are packaged and sold by Green Mountain Coffee, Keurig offers several other North American K-Cup brands, such as Caribou, Folgers and most recently, Starbucks (Starbucksdrinks.com).

The weaknesses of GMCR’s Keurig are that the K-cups are not recyclable and create more waste than traditionally brewed coffee, since the cups are made of plastic and aluminum. The company has received some bad press for being not eco-friendly enough. Another significant weakness is that Keurig’s strategy relies heavily on selling K-cups. The company makes most of it’s profit from the sale of coffee. However, in the fall of 2012, two of Keurig’s patents expire and other companies will likely begin producing pods that are compatible with Keurig brewing systems. Already, there are reusable cups on the market that consumers can buy to fill with the ground coffee of their choice.

Tassimo is made by Kraft and was first introduced to the market in 2004. There are three Tassimo single-cup brewers currently on the market. Tassimo brewers use non-reusable plastic beverage pods called Tassimo discs (T-Discs), which are produced by Kraft. Each has a barcode printed on its label, which the machine reads to calculate the amount of water, brewing time, and temperature for the specific beverage. The strengths of Tassimo’s strategy are centered around their unique barcode. While Keurig pods are pre-measured to have one amount, no matter how strong or how large you want your coffee, the barcode on the T-Disc tell the Tassimo brewer exactly how to make the perfect cup of the drink in the disc. Tassimo’s T-Discs also use liquid milk, instead of powdered milk in their T-Discs and is capable of making beverages with frothed milk (Tassimodirect.com). The result is that the consumer can make better specialty drinks, such as lattes and cappuccinos in their Tassimo. Also, the market has already seen the introduction of reusable cups for the Keurig, that the consumer can fill with the ground coffee of their choosing. This is bad news for a company that makes virtually all of its profit from coffee sales. There are also reusable pods for the Senseo. Tassimo is the only system that is protected because of their unique barcode system.

The weakness that is holding Tassimo back from taking more market share is the lack of popular brands of coffee available in T-Disc form. While Keurig has lots of big name coffees available in K-cup form, Tassimo’s most well-known brand available in T-Disc is Maxwell house. A very recent, and concerning, weakness is that Tassimo recalled 835,000 coffee makers in the United States and another 900,000 in Canada after dozens of reports of the brewers spraying hot liquid, coffee grounds or tea leaves (http://www.cpsc.gov). There have been 140 reports of incidents with the brewers spraying hot liquid, coffee grounds or tea leaves onto consumers, including 37 reports of second-degree burn injuries. This is very bad for Tassimo because when people do internet research to help them decide which single-cup brewer is right for them, this recall is the first thing they will see.

Senseo is made by Sara Lee, who recently bought the brand from Philips, and was one of the first single-cup brewers on the market in 2001. Unlike the other single-cup systems, the Senseo uses coffee “pods” instead of cups. The pods are made of coffee-filter paper and the consumer has the option to use one for a regular strength, or small, cup of coffee or to use two pods for a larger cup, such as a travel mug, or for a stronger cup of coffee.

The ability to choose one or two pods is Senseo’s biggest strength. Reviews from coffee critics consistently give Senseo high marks in flavor and quality when compared to the other popular single-cup coffee systems. Senseo’s weaknesses are that they have built an unattractive brand image and that they do not have contracts with any well-known coffee companies and have very little variety in the coffee pods that are available. They produce 11 coffee blends, all under the Senseo name, for the Senseo brewer (senseo.us). In an interview in February, Sara Lee’s Executive Chairman, Jan Bennink, told Reuters that the Senseo is “a very unsexy machine” (reuters.com) and that young people do not want to be associated with the brand. Market Analysis

Worldwide coffee sales peaked at $70.86 billion in 2011. Sales of single-serve packets accounted for $5.75 billion of that, or 8 per cent (Geller & Dalal, 2012). The single-cup coffee market grew at a rate 31 percent from 2010. Most Americans who consume coffee are still drinking traditionally brewed coffee. Coffee brewed in a single-cup machine from a pod, K-cup or T-Disc cost more than twice as much as the average ground coffee brewed in a drip coffee maker.

There are few barriers to entry into the single-cup coffee market. Companies that already have brand-name recognition are more able, and likely, to produce their own single-cup system. One barrier to entry is that there are already some highly recognized names in the market that will make it difficult for an unknown company to compete. Another barrier is the high cost of entry into the market. Developing the technology to create a single-cup brewing system that will take market share from the established players is a daunting task that will discourage small companies from attempting to move into the market.

The most interesting potential entrant to the market is Starbucks. In March, 2012, they announced that they will be releasing a single-cup coffee system later this year (Andrejczak, 2012). This is interesting because Starbucks and GMCR struck a deal in 2011 to sell Starbucks coffee in K-cups. The K-cups have been a huge success for both companies. So far, both companies are denying that the release of Starbucks’ Verismo will negatively affect the sell of Keurig machines and K-cups. The Verismo is being marketed as a high-end, high-pressure, specialty coffee system, more similar to the Nespresso than the Keurig and Tassimo, but considering how popular the Starbucks K-cups are, it will be interesting to see how it’s release affects Keurig and the single-cup coffee market. The Nespresso is worth mentioning in the potential entrants section because although they have been making single-cup machines for some time, they are only recently trying to grow in the United States market. They are opening small boutiques in major cities, most recently in San Francisco this year, and advertising on major television channels. They market their product as a high-end system, but it will be interesting to see how much of Keurig’s market share they take.

The substitutes in the single-cup coffee brewer market are traditional drip brewer coffee makers, caffeinated sodas, energy drinks and coffee from a coffee house, such as Starbucks, or from a fast food restaurant. McDonalds has invested a lot of money and advertising in the last five years reinventing their image as a hip coffee shop. Consumers can now get good coffee and specialty coffee beverages like cappuccinos and frappuccinos through the drive-thru window at a reasonable cost.

Suppliers have moderate bargaining power in the market. If companies that produce coffee do not want to put their coffee in K-Cup or T-Disc form, that hurts the companies that manufacture the brewing systems. Senseo has no relationship with coffee producers, and it has drastically affected their business.

Customers have moderate bargaining power as well. Most of the pods, discs and cups for the systems are sold in grocery stores or mass merchandisers. If Wal-Mart throws their support behind one of the companies, that company is more than likely going to experience growth in sales, while the other companies will be negatively affected. Likewise, if customers decide that they do not agree with the values, cost, etc of one of the companies in the market, they can take their business elsewhere and the loss of sales would hurt the company. However, if they are particular about the brand of coffee that they drink, they are tied to the company that sells that brand in a form that can be brewed in their machine. Keurig is the only machine that sells Starbucks coffee, for example, at least until the Verismo debuts this fall.

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