Oné autumn day in 1992, a man named Nick Lazaris came to visit Donald Schoenholt. Schoenholt is the proprietor of Gillies Coffee, the country’s oldest coffee merchant, and Lazaris was a young engineer, recently graduated from MIT. They sat down at a table on the floor of Schoenholt’s factory, in Brooklyn, and for the next two hours Lazaris attempted to convince Schoenholt to invest in a single serve coffee machine he and a fellow engineer at MIT had invented. Schoenholt was interested, but after careful consideration he decided to pass.
Not long ago I spoke with Schoenholt, and asked him about his decision to turn Lazaris down. Only a few days before our conversation Green Mountain Coffee Roasters, the Vermont outfit that bit when Lazaris came calling, had reported its eleventh consecutive quarter of better than 40 percent net sales growth—mostly on the back of its K-Cup sales. Here is Schoenholt’s response:
If you visit my home in Long Island, and you walk down to the garage, there’s a brick wall. If you then walk to the area right in front of my car, you’ll notice that there’s a dent in the brick. That’s where, for the last twenty years, I’ve been banging my head.
Schoenholt isn’t the only specialty roaster in the U.S. who may feel like banging his head against the wall when the subject of Keurig arises. In 1996 Green Mountain agreed to make a considerable investment in Keurig, and for the next decade the two companies worked closely to refine the Keurig technology; in 2006, Green Mountain bought Keurig outright. It was a good decision: Today, Green Mountain is expanding extraordinarily rapidly—for the last nine months it has produced net sales growth of seventy percent over the prior year. These amazing figures have come mostly on the strength of its dominance of the single serve coffee market in the United States. In late August, Fortune placed Green Mountain second on the their list of the world’s 100 fastest growing companies.
But some roasters aren’t banging their heads – they’re banging their fists. In recent years, Green Mountain has bought up the last remaining licensees of the Keurig technology in the United States. There is still one remaining K-Cup licensee in Canada (Van Houtte), but at this point Green Mountain’s position in the single serve coffee market in the U.S. is, as one analyst recently put it to me, “dominant—very dominant.” This has led many specialty coffee roasters to grumble about Green Mountain effectively locking them out of the fastest growing coffee market in the U.S. “Just because you were first to market doesn’t mean you should have the right to shut out the rest of the world completely,” said Tom Oliver, co-owner of Coffee Roasters of New Orleans.
In the last few years, as the economy has steadily imploded, more and more Americans have been saving money by eschewing coffee shops – according to the latest figures, about 85 percent now make their coffee at home – making the arrival of a clean, efficient, single serve coffee machine ideally timed. For the right customer, the virtues of the K-Cup, the coffee pod Green Mountain produces for use in the Keurig machine, are legion. The coffee is superior to similar quality coffee purchased ground from the supermarket, and requires virtually no cleanup. This makes it particularly attractive to commuters and offices, as well as businesses with reception areas, and it means that for roasters with direct mail order business, and also roasters who supply office buildings, the K-Cup market is a potentially huge source of new revenue.
At the moment, single serve coffee comprises about five percent of the total U.S. coffee market, and some analysts believe it could grow to a ten or even fifteen percent market share. In an industry as old as the coffee business, it is highly unusual for one company to so completely control such a rapidly expanding market, and it has led to dark murmurings within the industry about Green Mountain having a monopoly, or at least something like it. “I don’t know if they have a legal monopoly, but they have certainly shut everyone else out of the market,” Tom Oliver told me.
Last winter Green Mountain bought the last remaining K-Cup licensee in the U.S., San Jose-based Diedrich Coffee, for $290 million, besting Peet’s in a bitter bidding war. Before Green Mountain could complete the purchase, however, the Federal Trade Commission conducted an investigation to determine whether the acquisition would give Green Mountain a monopoly over the single serve market in the U.S. The FTC concluded that it would not. But when I recently asked an industry analyst which competitors are likely to offer a credible challenge to Green Mountain in the foreseeable future, he couldn’t name any. Last year Green Mountain made $803 million in sales, and this year it expects to sell nearly three billion K-Cups. Even if what Green Mountain has does not constitute a legal monopoly, might it be a “functional monopoly,” as Oliver put it?
Donald Schoenholt, for one, isn’t buying it. “The Keurig technology produces single serve coffee, and there are other single serve coffee products,” he said. “The category we’re talking about here is single serve coffee, not K-Cup coffee.” I asked Schoenholt how smaller roasters such as Gilles could get into the market. “You can’t,” he replied. “The world isn’t fair, and the coffee world isn’t fair. That’s the way things are in real life.”
There is a certain irony that Green Mountain is being criticized by smaller roasters for streamrolling the rest of the specialty coffee industry. Another way to look at its success with the K-Cup is to consider that in the last five years it has, as a mid-sized specialty roaster from Waterbury, Vermont, outmaneuvered Starbucks—a $17 billion company—and Kraft, a $100 billion company, and come to dominate a highly coveted sector of the coffee economy. From a business perspective this is impressive, particularly considering that Green Mountain invested in Keurig’s technology long before it was clear that there would be a pay off. But one of the consequences of the extraordinary way in which Green Mountain has vaulted itself up into the big leagues is that it has had to endure stress on its ideals.
From the beginning the founders of Green Mountain defined their company as a socially and environmentally progressive specialty roaster whose attitude was fundamentally local in nature – much like another famous Waterbury, Vermont company, Ben and Jerry’s. But they are currently traveling outside of their traditional precinct as a large specialty outfit, becoming a straight-up national coffee power. Awkward questions often accompany this kind of growth, and Green Mountain is no exception. “Green Mountain was among the very first roasters into being people sensitive and environmentally sensitive,” Donald Schoenholt told me. “They did it very early, and they’ve done it very, very well. Green Mountain is, in my opinion, really the model for the coffee industry in environmental and people sensitivity.” He paused.
“Now, why am I going to pains to say all of this? Because the K-Cup is the most anti-environmental item made in the coffee industry today, with the possible exception of the Nespresso cup, which is aluminum. The K-Cup is not biodegradable plastic – it’s the stuff you hate putting in landfills. So here is this company with this wonderful track record of sensitivity making its primary living today from an item that is an environmental nightmare.”
Not long ago I spoke with Dan Cox, who from 1981 to 1992 served as Green Mountain’s Vice President. Cox now runs Coffee Analysts, a coffee testing firm, and he emphasized to me that his remarks in no way represent Green Mountain. I asked him about the environmental problems associated with the K-Cup. “It puts them in a very awkward situation, and they don’t like it,” he said. “They have a task force working on this around the clock and they haven’t found a solution.”
He continued. “It’s more than an image problem for them – they’re pretty solid on their image. They just want to do the right thing and right now they know that putting fifty cups per pound of coffee in the dumpster doesn’t feel very good. But they’re going to sell two and a half billion dollars of K-Cups this year. What? Are they going say no to the orders? That’s not going to happen.”
Cox, who has served three terms as the president of the Specialty Coffee Association of America, is well known for having a frank way of expressing himself. When I asked him about complaints that Green Mountain is monopolizing the market, his response was characteristically direct. “It’s a really simple story: there is no monopoly,” he said. “A monopoly is where someone controls the market so that no-one else can get in. The market is not about K-cups. The market is about single serve coffee. That’s the category, and in single serve you have multiple players.”
According to Cox, complaints about the Green Mountain’s control of the K-Cup amount to little more than “spilled milk. They spent years making [the technology] technically proficient,” he told me. “At the time, it was a huge risk. It was a gamble. It wasn’t on the market, and they spent a lot of money and it panned out. Whenever someone makes something new, of course all of the competitors wish they’d thought of it. But they want Green Mountain to give their business away? Come on. Grow up.”
If there’s no way for specialty roasters to get in on the action, I asked Cox, how do they counter the growing demand for K-Cups? The answer is simple, he responded. The K-Cup offers consumers good coffee, but not high-quality specialty coffee. That”, he said, “is what specialty roasters should emphasize in their marketing. If you like your coffee stronger you can’t get it out of a K-Cup – the most coffee you can get in one of those things is about 11 grams,” he said. “So if you’re a microroaster, you can say ‘Hey listen, we have excellent coffees that we make fresh and you make at any strength you want.’”
Many specialty roasters agree with Cox on this point. In an email, Paul Thornton, the roastmaster at Portland-based Coffee Bean International, told me, “There is a very clear difference in the experience a consumer might have between automated single brew from a Keurig, and manual single brew from a coffee shop. I personally feel it’s equal to the comparable difference between truck stop coffee and a coffee shop” – two different markets.
I heard a similar sentiment from Larry Challain, the owner of Olympia, Washington based Batdorf and Bronson. “I think this is all a tempest in a K-Cup,” he told me. “I applaud Green Mountain for their success with Keurig and K-Cups. A K-Cup brewed in a Keurig brewer makes a good cup of coffee for what I would call a “gourmet” product.” However, Challain said, “I do not consider pre-ground coffee sealed in a plastic container that sits for months at a time on the shelf to be specialty coffee. Batdorf & Bronson has no interest in this single serve market. Quite frankly I think Green Mountain should be applauded for upgrading the quality of the convenience sector niche.”