For Jane The Tutor ONLY

On March 17, 2011, the vice president and general manager of Keurig Incorporated’s At

Home division, John Whoriskey, sat in his office in Reading, Massachusetts, reminiscing

about the changes he had been a part of since joining the company in 2002. At that time

Keurig was a privately held company with just over $20 million in revenues and a plan to

enter the single serve coffee arena for home consumers, which Whoriskey himself had been

hired to head up (see Exhibit 1). Nine years later Keurig was a wholly owned subsidiary of

Green Mountain Coffee Roasters, Inc. (GMCR), a publicly traded company with 2010 net

revenues of $1.36 billion (see Exhibit 2) and a market capitalization of between $8 and $9

billion.

In 2003 Whoriskey oversaw the introduction of Keurig’s first At Home brewer, at the same

time convincing the company’s board of directors to take the risky approach of launching

design and development of a next-generation brewer before the first brewer had reached

the marketplace. That decision turned out to be critical to Keurig, providing the basis for a

suite of products that secured Keurig the four best-selling coffee makers, in dollars, in Q4

2010. Its strategy had been to offer a wide variety of coffees compatible with its single

serve brewing system. Now, the company had just concluded an agreement with Dunkin’

Donuts that would make five flavors of its coffee available in K-Cup® portion packs

compatible with Keurig brewers. Starbucks, a company synonymous with super-premium

gourmet coffee, had also agreed to offer its coffee and Tazo tea for the Keurig® single-cup

brewing system.

In the fourth quarter of 2010, approximately 25 percent of all coffee makers sold in the

United States were Keurig-branded machines, and Keurig was recognized as among

the leaders in the marketplace. Keurig now faced different challenges than in 2003 when it

was a small, unknown marketplace entrant. Among them, Whoriskey considered what

impact the impending expiration of key technology patents and the perceived environmental

impact of the K-Cup® portion packs could have on the company’s growth. Whoriskey

wondered what Keurig’s growth potential was, and how the new arrangements with

Starbucks and Dunkin’ Donuts could be leveraged to achieve it.

The Company and Its Products

Keurig had been founded to commercialize an innovative technology that allowed coffee

lovers to brew one perfect cup of coffee at a time. Beginning with the company’s

inception in 1992, the word “keurig,” derived from the Dutch word for excellence, had been

the guiding principle behind the company’s products and services. With its patented single

serve brewing system, Keurig first entered the office coffee service, or Away From Home

(AFH), marketplace in 1998. In 2003 Keurig became one of the first to enter the At Home

(AH) marketplace with a single-cup brewer designed for use in the home.

Keurig’s single-portion brewer strategy was built on three key product features: a coffee

brewer that perfectly controlled the amount, temperature, and pressure of water to provide a

consistently superior-tasting cup of coffee; a unique, patented portion-pack system

(marketed under the K-Cup® brand) containing ground coffee beans as well as filter paper;

and a varied coffee selection to replicate the choices available in a gourmet coffeehouse.

This varied coffee selection was a key differentiator for Keurig and was achieved through

licensing arrangements with a variety of gourmet coffee roasters. A selective but

nonexclusive relationship with a coffee roaster enabled the roaster to pack its specialty

coffees in the K-Cup® portion pack. Coffee roasters controlled the quality of their coffee and

the number of varieties available through portion-pack production lines. A production line

was owned or leased and operated by the coffee roaster. K-Cup® portion packs were

produced by four North American roasters with more than seventy-five coffee varieties.

Roaster partners included GMCR, Diedrich Coffee, Inc., Van Houtte, Inc., and Timothy’s

Coffee of the World, Inc. The roaster paid Keurig a royalty for each K-Cup sold. Other

roaster partners were subsequently added, such as Tully’s in 2006.

At the time of Keurig’s entrance into the AH marketplace in 2003, the company was privately

held, with three significant shareholders. MDT, an investment advisory firm that managed a

U.S.-based profit-sharing plan, had served as Keurig’s lead venture capital investor since

1995 and led the company’s board of directors. GMCR held a 42 percent stake in Keurig,

and Van Houtte owned 28 percent. As provided for in separate shareholder agreements with

MDT, neither GMCR nor Van Houtte was allowed to have a seat on the board of directors,

enabling Keurig to maintain a roaster-neutral company strategy.

At Home Product Introduction

Keurig felt that being one of the first entrants in the product category was critical to its

performance. The company’s launch of the B100 single-cup brewer in September 2003

coincided with Salton’s U.S. launch of the Melitta One:One brewer and Flavia’s SB100

brewer. Each brewer differentiated itself by its features, underlying brewing technology, and

packaging of the coffee. Both the Keurig and Flavia brewers used a proprietary portion

pack, while the Melitta brewer used a 44 mm pod. All three provided the ability to brew a

single cup of coffee at a time (see Exhibit 3). The Keurig and Flavia systems (both brewer

and coffee) were only available online, whereas the Melitta system was available online and

in limited retail outlets.

8-2a A New Business Is Brewing

The AH single serve concept was well received by coffee lovers. Early press and user

reviews showed that customers were happy with the ability to brew a single cup of coffee

with no mess—no scooping of coffee or dealing with filters—in 60–90 seconds. Feedback

among the users of the three initial entrants varied, however, with the selection of coffee

varieties a common thread for discussion. Melitta One:One offered only five options and the

Flavia system was only slightly better, with a choice of eleven flavors. In addition, both

systems’ offerings were restricted to a proprietary roaster. Meanwhile Keurig offered a total

of more than seventy-five options encompassing a variety of flavors from four different

coffee roasters. It quickly became apparent that feedback on a brewing system was often

driven by the user’s individual coffee preferences, so greater quality and variety of coffee

positioned Keurig well in the marketplace. Users complained, however, that all three

competitors lacked availability of the proprietary coffee packs in retail stores. Online

ordering was the only option and required some advance planning to have a continuous

supply of coffee.

Some new, larger players entered the single serve marketplace in 2004. In March of that

year, Phillips and Sara Lee International launched the Senseo 7810 in the United States.

The pod-based system brewed Sara Lee’s Douwe Egberts coffee brand and produced a

distinct frothy layer on top of the brewed coffee. The U.S. introduction of the Senseo

followed launches in the Netherlands, France, Germany, and Denmark between 2001 and

2003. More than 5 million machines and 2.5 billion pods had already been sold in those

countries. The brewer’s primarily plastic construction was still viewed as sturdy and

overall it received positive reviews for its simplicity and ease of use.

In February 2004 Procter & Gamble announced that it had joined forces with four appliance

marketers to launch the Home Café single-cup brewing system in conjunction with a

$50 million-plus marketing campaign. The Home Café pod system would brew Folgers and

Millstone coffees. Black & Decker produced the first Home Café brewing system in May

2004, but users frequently complained about the machine leaking, the difficulty of properly

placing the pod in its holder, and the volume of plastic used in the brewer construction. In

late 2004 the Mr. Coffee Home Café brewer was added to the line and received more

positive reviews.

Both the Senseo and Black & Decker Home Café systems were available online and in

limited retail outlets, an improvement upon the limited distribution of early products. Across

all products, however, reviews of the coffee varied from one extreme to the other,

highlighting the challenge of being able to meet the taste requirements of a range of coffee

drinkers, from the casual one-cup-a-day drinker to the gourmet coffee snob.

Even so, the entrance of P&G marked a turning point for single serve brewing. Extensive ad

campaigns, including infomercials and an appearance on the show Survivor in September

2004, created awareness of the Home Café product line. In turn, this created spillover

recognition for all single serve brewing systems, and the category grew

8-2b Managing Brewer Manufacturing Costs

At the time of Keurig’s B100 launch, management knew that its brewer price was very high.

Even so, Keurig management felt that it was important to gain experience and consumer

exposure in this emerging business. Mark Wood, VP of new business development,

explained, “Launching new products stimulates interest in the company and in the category.”

When the B100 was introduced in fall 2003, Keurig embarked on an ambitious threepronged

approach to address the brewer’s cost structure. The approach consisted of

reengineering the existing brewer to reduce cost, evaluating overseas options for brewer

manufacturing, and launching a new brewer project in time for the holiday 2004 season,

including retail distribution. Kevin Sullivan, VP of engineering, joined Keurig just after the

initial launch of the B100 brewer and, after overseeing modest cost reductions on the

current design, focused the engineering team’s attention on the next-generation brewer, the

B50 .

The B50 design effort replicated existing Keurig benefits: time, temperature, and volume

(TTV) control, use of the existing K-Cup® portion pack, at least two brew volumes (e.g., 6

oz., 8 oz.), and support of a retail price point of $149. Limiting the variance in the TTV

components was key to meeting the taste profile requirements of both the “Cuppers”

and Keurig’s roaster partners. Engineering evaluated three alternatives in its design

process: redesign of the B100 brewer, evaluation of the pod systems in the marketplace to

see how they could be modified to achieve the Keurig benefits, and a bottoms-up new

design of the brewer. Ultimately Keurig chose to start from scratch when designing the new

brewer, balancing the product features with budget and schedule requirements to meet the

fourth quarter 2004 deliverable.

In parallel with the B50 design efforts, Dick Sweeney, VP of contract manufacturing and

quality assurance, oversaw efforts to select a manufacturer for both the B100 and the new

B50 brewers. After narrowing the field down to three companies, Keurig selected a single

vendor in late December 2003. Production of the B50 began in September 2004, and in

November 2004 the company received the first shipment of brewers via airfreight to meet

the goal of holiday distribution.

8-2c Keurig’s Retail Launch Strategy

Keurig’s retail launch strategy included two features central to its success. Whoriskey

explained it as follows:

We recognized that retailers were different and competed in different market

segments. Selling a single brewer could create conflict among retailers that could limit

distribution.

A high-end retailer such as Williams-Sonoma did not typically carry the same

product assortment as a mass merchant like Target. We also needed to offer

assurance to retailers that their support of a premium brewer would be worth their

investment.

As a result, Keurig envisioned producing a suite of brewers—“good, better, best”—that

would allow it to offer different products in each retail segment to meet the needs of those

retailers’ target customers. The products would match varying retail price points and offer a

range of product features. The “better” category of product would provide broader appeal for

multiple segments. Initially the B50, with its improved cost structure, fit the better category

and was designed to meet a price point of around $149. In some cases, a “good, better,

best” suite of products also allowed Keurig to meet varying retailer margin requirements. As

shown in Exhibit 5, average profit margins varied between mass merchants such as Target

and premium retailers such as Williams-Sonoma.

In launching the B50 brewer, Keurig also needed to address retailer concerns that

investments in support of Keurig would not be eroded away. That investment included

inventory costs to carry the brewer, shelf space, advertising, and training of in-store staff

about the product. To address potential retailer concerns, Keurig created a minimum

advertised price (MAP) program.

Premium manufacturers in numerous industries, including Bose, Viking, Sub-Zero, HP, and

Nintendo, often used MAP programs. These programs minimized intrabrand price

competition by providing incentives to retailers who only advertised prices at or above the

MAP price; a common incentive was cooperative advertising dollars that could be used to

subsidize retailers’ advertising expenses. A retailer that chose to advertise in a manner

inconsistent with the MAP program could lose out on these financial incentives. A retailer

that repeatedly violated these terms could eventually lose the right to distribute a

manufacturer’s product. From the retailers’ perspective, the MAP price provided some

comfort that competing retailers would not undercut them on advertised prices.

In the months leading up to the B50 launch, Whoriskey focused on a number of issues

associated with moving into the retail environment, including gaining product placements

with retailers, identifying a logistics partner that would manage the fulfillment to retail stores,

and introducing new, lower-count-size packages of K-Cup® portion packs. By the holiday

2004 season, ten retailers had agreed to distribute the B50 brewer in about a hundred

stores. Keurig selected M. Block and Sons as the exclusive retail distribution partner for the

brewer and completed repackaging of K-Cup® portion packs to offer quantities of eighteen

at a MAP price of $9.95. Whereas Sara Lee and P&G focused their marketing dollars on

television and print advertising, Keurig devoted its more limited advertising dollars to in-store

demonstrations of the product. The television and print coverage by Keurig’s rivals

increased consumers’ exposure to the single serve concept and sent them to stores with

curiosity about the products. Once in the stores, Keurig hoped its demos would get people

hooked on the taste, ease, and simplicity of the Keurig system.

8-3a Competitor Activity

Kraft partnered with Braun to introduce the Tassimo Hot Beverage System in the United

States in September 2005. Designed by Kraft, the product had been introduced in France,

Switzerland, and the United Kingdom in 2004 and was touted as the leading competitor to

the Senseo system there. The Tassimo system used a proprietary portion pack, the T-Disc,

which included a bar code that provided information to the machine about the appropriate

brewing settings (amount of water, brewing time, and temperature). In addition to coffee, the

Tassimo offered cappuccino, espresso, café crema, tea, and hot chocolate—a total of about

fifteen varieties, featuring Kraft brands such as Gevalia and Maxwell House as well as Kraft distributed

Twinings Tea. The brewer’s suggested retail price was $169.99, with a cost of

about $0.50 per T-Disc. Like P&G, Kraft used its marketing muscle to push the Tassimo

system and the entire single serve segment of coffee brewing. The system was featured in

an episode of The Apprentice: Martha Stewart, in which contestants were tasked with

creating a retail space for selling the new system. Kraft reportedly invested $75 million in

marketing the system’s introduction.

Kraft subsequently announced a partnership with Starbucks in December 2007, introducing

four Starbucks varieties in time for the holiday season. Starbucks positioned it as a natural

fit for the company, a “way to provide an authentic Starbucks coffee experience to our

customers, and to do so anywhere and anytime they prefer.” This expanded relationship

between Kraft and Starbucks (building off a 1998 supply and distribution agreement) came

on the heels of a revamped business plan to “spur stronger and more profitable growth”

in the Tassimo system. It also expanded Tassimo’s beverage offerings to more than sixty

worldwide. At the same time, Kraft announced a new brewer alliance with Bosch to

replace Braun, which had been acquired by a coffee competitor, P&G.

Additionally, another competitor had appeared on the scene in 2005. Bunn was a

manufacturer of drip coffee makers for commercial and AH applications. With the Bunn My

Café, the company joined the single serve segment, advertising a patented jet action

sprayhead as a differentiator in the brewer’s ability to release flavor and aroma. The podbased

brewer used a pour-over method that required the consumer to pour in the desired

amount of water, from 4 to 14 ounces, each time a new cup was brewed. The pod drawer

was designed to receive a range of pod sizes, enabling the brewer to be used with a variety

of different roasters’ pods and increasing the variety of coffees available for use with the

brewer. The brewer was introduced with a suggested retail price of $199.95.

Not all product introductions were successful, however. P&G experienced slow sales and a

smaller adoption of its Home Café line after its initial splash. In June 2006 the company

announced it would cut marketing funds for the product, after having spent an estimated

$41 million since the launch of the first brewer in 2004. Similarly, after significant success in

Europe, Senseo’s sales and product innovation in the United States seemed to trail off.

The stumbles and uncertainty of some of its competitors did not slow Keurig down. In fall

2005 Keurig introduced two new AH brewers to its product line: the Keurig Elite B40 and the

Keurig Special Edition B60. With variations in the programmability and features, these

products helped the company target the “good” and “best” segments of its distribution

strategy, respectively. The B40 was generally offered at a retail price of $99.95, while the

B60 was generally offered at $199.95. In fall 2006 the Keurig Platinum B70 was introduced

with the most robust set of features and functionality to date, including four cup sizes, a

programmable LCD display, and a larger water reservoir. Each brewer provided the same

user experience in terms of ease of use and brewing of a great cup of coffee, consistent

with Keurig’s overall product commitment. By the first quarter of 2007, Keurig had secured a

position as one of the market leaders in the small but growing single-cup segment of the

broader coffee maker category (see Exhibit 6).

8-3b Changes at Keurig

In June 2006 GMCR completed the acquisition of the remaining shares of Keurig,

transitioning Keurig from a small, privately held company to a wholly owned subsidiary of a

publicly traded company. In doing so, GMCR not only signaled its commitment to single

serve brewing but also reaffirmed its support of Keurig’s multibrand strategy, one of the

company’s key differentiating features and an important element of its success. This move

enabled Keurig to leverage the resources of GMCR to further its growth in the single serve

segment. The added financial backing of GMCR was critical to Keurig’s ongoing product

innovation and also allowed the company to aggressively protect its design and technology

investments.

Ownership by GMCR allowed Keurig to pursue a new avenue for expansion of its robust

offering of coffee varieties with its single serve brewers. As an example, Keurig and Caribou

Coffee announced an agreement in early 2007 that would make eight flavors of Caribou

Coffee available in K-Cup® portion packs. This arrangement represented a new model for

production and sales of K-Cup® portion packs.

Under the terms of the arrangement, Caribou Coffee will blend and sell its gourmet

coffee beans to Keurig. Keurig will be responsible for packaging the coffee into KCups

in accordance with Caribou Coffee’s specifications. Under the license from

Caribou Coffee, Keurig will also serve as the wholesale distributor and a direct

retailer for all Caribou Coffee K-Cups.

Rather than requiring a roaster partner to operate its own production line, Keurig could

benefit from the manufacturing capabilities of its parent to pursue relationships without

upfront capital or leasing costs.

At the same time, tension existed between GMCR and the other roasters over the longevity

of GMCR’s commitment to a multibrand strategy. This tension eased as GMCR embarked

on a strategy of acquiring the wholesale businesses, including the K-Cup® portion-pack

production lines, of each of the original roaster partners, beginning with Tully’s in early 2009,

followed by Timothy’s in late 2009, and Diedrich’s Coffee and Van Houtte in 2010. Driving

these acquisitions was GMCR’s desire to become a leader in the highly fragmented coffee

industry. GMCR added complementary brands to its portfolio while expanding its geographic

presence and manufacturing and distribution capabilities.

With GMCR’s backing, Keurig’s ongoing success enabled it to expand its marketing and

distribution presence. In the holiday 2007 season, Keurig launched a $3 million television

advertising campaign in sixteen cities, coupling it with in-store demonstrations and

cooperative advertising support in retail stores. That investment grew close to $20 million,

including a $6 million national advertising campaign, for the holiday 2008 season. In

conjunction with that same holiday season, Keurig and GMCR also launched brewer and

twelve-count K-Cup® portion-pack offerings in the grocery channel, adding to the purchase

options available to consumers. The total number of retail outlets, including grocery stores,

exceeded 16,000 locations by the end of 2008 (see Exhibit 7). Keurig brewer sales

continued to grow, and in the fourth quarter of 2008 Keurig had captured close to 20 percent

of total coffee maker sales in dollars (see Exhibits 8 and 9). Keurig further expanded the

brewer options available to the consumer, introducing the first third-party brewer designed

using Keurig’s proprietary and patented brewing technology in 2007.

8-3c Marketplace Evolution

A question facing Keurig and all manufacturers of single serve brewing systems was the

state of the coffee marketplace and the ongoing role of single serve applications. The

marketplace for drip coffee makers in the United States was stagnant, with a decline of

approximately 3 percent from 2004 to 2010 (see Exhibit 10). Single serve coffee makers,

however, had grown to represent about 19 percent of the total sales volume in that same

time. Importantly, about 71 percent of the 115 million households in America owned a coffee

maker in 2008. In terms of coffee consumption, research showed that 44 percent of all U.S.

consumers had a daily cup of coffee and 75 percent of that consumption was done in the

home.

Industry analyst Harry Balzer of the NPD Group commented:

Coffee consumption per capita is fairly stable in the U.S. So for a coffee company to

gain share in the marketplace, it needs to shift share or get consumers to pay more

for a cup of coffee. Manufacturers of coffee makers have to address one or more of

three key components: novelty, time, or money—is it new, does it save time, or

does it save money?

Analysis of the foreign marketplace could also provide some insight into the U.S.

marketplace’s potential. Industry analyst Scott Van Winkle pointed to the success of

Nespresso S.A., a business of Nestle Group, in Europe as an indicator of the potential for

Keurig in the United States: “I could see Keurig’s market share for coffee makers grow close

to 50 percent based on the precedent set by Nespresso in Europe, where they have

reached the 40 percent range.” Initially introduced in Switzerland in 1986, Nespresso’s

single serve espresso machine experienced a slow start until the mid-1990s, when it

entered a period of rapid growth. According to the company, Nespresso achieved organic

growth of more than 20 percent in 2010 and estimated “global market share of around 20

percent in the segment of espresso and filter portioned coffee machines.”

8-4a Choose

From its initial entry into single serve brewing, Keurig recognized the importance of choice

to allow each person to find a coffee that met his individual taste preferences. Keurig

continued on this path by entering into relationships with three key coffee brands, each with

its own loyal following: Folger’s Gourmet Selections in 2010, followed by Dunkin’ Donuts

and Starbucks in 2011. In February 2011 GMCR entered into a promotion, manufacturing,

and distribution agreement with Dunkin’ Donuts that would make five flavors available in KCup

® portion packs, sold exclusively in its restaurants by the second half of 2011. In

addition, Keurig brewers occasionally would be sold in the restaurants. GMCR would be

responsible for packaging the K-Cup® portion packs using coffee that was sourced and

roasted to Dunkin’ Donuts specifications.

In March 2011 GMCR entered into a manufacturing, marketing, distribution, and sales

relationship with Starbucks that would make Starbucks and Tazo tea K-Cup® portion packs

available by fall 2011. Starbucks had previously introduced its own portion pack of instant

coffee targeted at single serve consumers, Starbucks VIA Ready Brew, which had achieved

$100 million in worldwide sales in under a year. The relationship would enable Keurig to

potentially reach the approximately 50 million customers served in Starbucks stores every

week, an estimated 80 percent of whom did not have a single serve brewer at home.

The Starbucks relationship presented an exciting opportunity for Keurig to add a superpremium

coffee brand to its robust offering of flavors. However, there was some uncertainty

concerning the long-term benefit. Starbucks had already announced a strategy to pursue

multiple options in single serve brewing.

“The single serve coffee category in the U.S., and much of the world for that matter,

is in its beginning stages of development,” said Jeff Hansberry, president,

Starbucks Consumer Products Group. “At this very early stage, there are numerous

contenders and no demonstrated long-term winners related to either format or

machines. Following our very successful introduction of Starbucks VIA Ready Brew

in the U.S. and into a growing number of international markets, Starbucks will

continue to explore the many single serve and on-the-go solutions and options

available to us, and to participate in those where we can better and more

conveniently serve our customers wherever they may be.”

The question remained whether Starbucks’s relationship with GMCR and Keurig

represented an interim solution or whether it would fulfill a key component in Starbucks’s

overall single serve offering.

In conjunction with expanding their coffee offerings, Keurig and GMCR also continued to

grow the grocery presence to enable consumers to easily obtain K-Cup® portion packs. By

the end of 2010, K-Cup® portion packs could be purchased in 98 percent of grocery stores

in the Northeast and 61 percent of all grocery stores in the United States

8-4b Brew

Its commitment to technological innovation continued to be a key component of Keurig’s

success. Where appropriate, Keurig obtained patents covering its innovations and

vigorously defended them. In January 2007 Keurig filed a patent infringement lawsuit

against Kraft Foods Inc., Kraft Foods Global, Inc., and Tassimo Corporation asserting that

Kraft’s T-Discs infringed upon a Keurig technology patent filed in August 2003. In October

2008 Kraft agreed to settle out of court with a lump sum of $17 million for a limited,

nonexclusive license for applicable Keurig patents related to beverage machines and

beverage cartridges.

More recently, Keurig had filed a lawsuit against Sturm Foods:

The Sturm portion packs that we’ve seen appearing on several retailer shelves

contain instant coffee and state they are intended for use in Keurig brewers. As our

complaint notes, our lawsuit asserts that Sturm’s portion packs infringe two patents,

which cover certain technologies relating to the use of brewers and portion packs.

Keurig was looking for similar success in this suit. However, the longevity of some of the

existing patents still could pose a problem. Certain patents associated with the current

generation of K-Cup® portion packs were set to expire in 2012 and 2017, while brewer

patents had expiration dates out to 2023. Pending patent applications associated with the

current generation of K-Cup® portion packs, if issued, could extend those expiration dates

to 2023 as well. Without patent protection, the door could be opened to competitors such as

Sturm Foods, which would look to market a product to compete with the K-Cup® portion

pack, thus eroding GMCR’s own coffee sales as well as royalties from other roaster coffee

sales using the Keurig technology.

Another issue facing Keurig lay in the patented K-Cup® portion pack itself. Key to the

quality and freshness of its coffee, the K-Cup® design included materials and a heat-sealing

process that made recycling difficult. Keurig had introduced the My K-Cup® reusable filter

assembly in 2006, a reusable filter designed to work with the Keurig single-cup brewing

system. Although it was initially targeted for use by consumers wanting to use their own

gourmet coffee instead of a prepackaged portion pack, it could also provide a solution to

environmentally conscious users who were concerned with the disposal of the used K-Cup®

portion packs, which contained plastic and other non-recyclable materials. That solution did

not address those consumers interested in the convenience of the traditional K-Cup portion

pack, however.

Keurig’s competitors were facing the same challenge. In December 2010 Bunn My Café had

introduced a new brewer that used pods that could be composted. In Europe, Nespresso

had introduced dedicated portion-pack collection points to facilitate capsule recycling, and in

2009 it committed to tripling its recycling capacity by 2013. A similar issue had arisen in the

bottled water industry. The convenience of bottled water, together with consumers’ desire for

a healthier alternative to soda, had resulted in rapid growth in sales of bottled water. But

concerns about the volume of empty plastic containers in landfills threatened the industry

and caused sales to slow, leaving bottled water manufacturers scrambling to find solutions

to their environmental challenge.

Concerns about the environmental impact of the K-Cup portion pack had started to surface

in user comments on websites and in newspapers such as the New York Times.

Estimates of the amount of non-recyclable material from the K-Cups appearing in landfills

had some users contemplating use of another, more environmentally friendly single-cup

brewing system. Keurig’s own life cycle analysis compared a number of environmental

factors of the Keurig single-cup brewing system to traditional drip brewing. The analysis had

shown that product-packaging disposal contributed only a fraction of its total environmental

impact as compared to the production of the packaging itself. As a result, the company

was working with its packaging suppliers to improve the environmental dimensions of the

packaging production process. The introduction of nested packaging to reduce the size of a

box of K-Cup® portion packs and experimentation with a tea-based K-Cup® portion pack

made with paper were additional environmental initiatives undertaken by the company. With

the increasing popularity of the Keurig single-cup brewing system, the K-Cup® portion-pack

packaging was one of the company’s most significant environmental challenges and needed

to be addressed to prevent erosion of its position in the marketplace.

8-4c Enjoy?

By March 2011, Keurig was in an enviable position. In the fourth quarter of 2010 it had

shipped a record number of products, and Keurig models were the four best-selling brewers,

in dollar sales, in the United States. The company had also just announced the agreements

with Dunkin’ Donuts and Starbucks, which would strengthen its multi-brand approach and

penetrate a new retail outlet.

But Whoriskey and the rest of the senior leadership team at Keurig and GMCR couldn’t help

but turn their attention to the future. Whoriskey was eager to begin writing the next chapter

in Keurig’s success story, but questioned the potential size of the single serve opportunity,

the impact of expiring technology patents and environmental concerns, and how to

maximize the effectiveness of Keurig’s relationships with its coffee-roasting partners.