Wednesday, January 25, 2012

Will the K-Cup kill specialty coffee?

Probably not. I like this article by Pan Demetrakakes, editor of Specialty Coffee magazine. The link to the article is not working, so I am attaching the article here. Enjoy.

By Pan Demetrakakes

The Pod People are coming.

Green Mountain Coffee Roasters has become the biggest roaster in America largely on the strength of its Keurig pod brewing system. Keurig, which Green Mountain acquired in 2006, is the developer of single-serve K-Cup pods.

The K-Cup fits my personal criterion for a truly dynamic innovation: It looks painfully obvious, but only in retrospect. It’s a simple plastic cup filled with ground coffee and topped with induction-seal foil. A Keurig brewer pierces the pod and brews a perfect cup of coffee—or at least, one that’s a lot better than the alternative, which is often the dregs of a pot that’s been sitting on a burner for heaven knows how long. It makes the K-Cup an attractive alternative for offices (including my own), as well as gas stations, waiting rooms and any other location where coffee of indifferent quality is often consumed.

That includes home kitchens. Green Mountain is counting on home sales of the K-Cup brewer to push sales even higher. And they’ve already had dizzying success. Green Mountain now is the leading roaster/packager of single-serve coffee. Its sales have multiplied by five in the last three years, and its stock reached an all-time high in September (although it’s dropped sharply since then).

Green Mountain succeeded in large part because of a smart basic decision: making K-Cup technology freely available. Coffee roasters who want to use the Keurig system need only license it from Green Mountain. Major retailers who have taken advantage include Starbucks and Dunkin’ Donuts, both of whom are planning to use K-Cup pods to expand the already substantial grocery sales for their branded coffee.

Contrast with Nestlé, which has a similar pierce-the-pod system in Nespresso. Since introducing Nespresso in 1986, Nestlé has tried to control it down to the last coffee bean. It markets both the machines and the pods that go into them, and allows no one else to do so.

This business model worked great for Apple Computers. But ground coffee, however complex and subtle it may be, is not software. And while Nespresso has consistently been lucrative for Nestlé, the company is now embroiled in lawsuits in France, Switzerland and Holland over pirated Nespresso capsules, while the Keurig system soars past.

What does this all mean for the specialty coffee retailer?

Movie buffs will recognize this column’s headline as a play on “Invasion of the Body Snatchers,” a sci-fi classic from 1956 (there have been a couple of remakes) about an alien invasion of human lookalikes. They start out as pods that bloom into identical replicas of whichever human is unfortunate enough to be nearby.

Is that destined to be the fate of specialty coffee? Will the K-Cup pod become the incubus for mechanically brewed coffee that smells and tastes so much like the good stuff that it will confuse consumers?

I don’t think so. In fact, the K-Cup could be a net positive for the specialty coffee industry by raising consumers’ expectations. The more people are exposed to good coffee, the more likely they are to seek it out, in whatever form.

Your competitor can sometimes be your ally. That’s true for Starbucks, which raised the general consciousness about good coffee enormously, and it may very well hold true for the K-Cup.

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