Green Mountain has identified five factors as the foundation of Keurig’s success in the coffee pod market: the Keurig creates an (1) ultra-convenient cup of (2) fresh tasting coffee via a machine that is (3) intuitively simple, resulting in (4) less wasted coffee for consumers, while offering them a (5) vast array of brands. Under this model, the company sold nearly US$2.3 billion worth of Green Mountain branded or licensed retail coffee pods in the United States in 2013. Three factors have been important in establishing the Keurig as America’s preferred pod machine: (1) the continued growth of café coffee culture that has created demand for better retail coffee; (2) the historic preference of filtered drip style coffee for home consumption rather than espresso or instant coffee mixes; and (3) the lack of competitors able to deliver on the variety of brands that US consumers demand. As the company examines international expansion in the United Kingdom, Sweden, South Korea and Australia, its targeted markets present a unique set of challenges that could stifle early success, but also provide much needed guidance.
Can Growth of Café Signify a Shift in Retail Coffee Preferences?
Amongst the dozen markets targeted for international expansion, Green Mountain has identified the United Kingdom, Sweden, South Korea, and Australia as first priorities. Each of these markets vary in terms of the ways consumers drink coffee, but one important common characteristic is the presence of high per capita spend at specialist coffee shops, where consumers spent at least at least US$35 per capita in each market. Higher spending at these outlets can be interpreted as an indicator of shifting consumer preferences. High quality on-trade coffee in the United States has helped lift off-trade coffee value and opened the door for Green Mountain. The “always fresh” and single-serve nature of the Keurig machine appeals to consumers accustomed to ordering fresh single-serve coffee when out of the home. Green Mountain’s hope is that a similar affinity for on-trade coffee in the United Kingdom, Sweden, South Korea and Australia will help propel the Keurig in these markets.
Coffee Consumption Across GMCR’s Key Markets
Source: Euromonitor International
A Question of Taste
The differences in the types of coffee enjoyed by consumers across these markets (both at home and at foodservice) present a major hurdle. US consumers have historically consumed drip coffee at home, with filter coffee machines representing the majority of home coffee machines. The Keurig’s ability to provide a fresh tasting cup of this style of coffee therefore met consumer demand. Conversely, instant coffee has long been the dominant retail coffee type in the UK, South Korea and Australia, as shown above. Granted, foodservice coffee is on the rise, but these drinks are often espresso-based beverages like the cappuccinos, lattes, and flat whites preferred in Australia. The result is a strong percentage for overall growth of coffee consumption in South Korea, Australia, and the United Kingdom, but from a much smaller base. In absolute terms, retail RTD volume growth of instant coffee from 2008-13 still surpassed fresh coffee growth in all four priority markets.
Limited volume growth should not be interpreted as a lack of opportunity for Green Mountain in these countries. Value growth for fresh coffee remains strong in each market, especially as premiumisation within instant coffee is much harder to achieve. Pods, which are present in each market thanks to machines like the Nespresso, Senseo and Tassimo, have helped acquaint consumers with single serve coffee, but at high price points. Keurig has an opportunity to enter the market at a much lower price, but must also position its coffee as a step up in quality from instant. The lack of familiarity with the style of coffee produced by Keurig will require the company to invest in a strong marketing campaign that convinces consumers of the quality and value of the Keurig product.
A Little Help from Licensed Friends
The variety of brands that Green Mountain makes available to consumers is another key factor in the company’s US success. Unlike Nespresso, GMCR has long collaborated with other coffee manufacturers. This could be one of the company’s few early advantages in its priority markets. Pairing with foodservice brands such as Costa Coffee in the UK, Wayne’s in Sweden, Gloria Jean’s in Australia, and Starbucks in South Korea would give the machines immediate credibility and recognition amongst consumers. The strategy has worked in the US with Starbucks KCups being amongst the most popular brands. This also gives Keurig easy routes to distribution, so long as specialist coffee shops do not view the brewer as a threat to foodservice sales. On the other hand, GMCR will need to demonstrate why foodservice outlets would want to pair with the company. When Starbucks extended their agreement with GMCR in the United States in 2013, penetration of the Keurig brewer amidst Starbucks’ own failed single-serve coffee maker made sense for the two to continue the partnership. Absent strong support that the Keurig system will success in these markets, therefore creating a retail revenue stream for these coffee shop operators, GMCR may have to lower their own margins during this period.
Help from licensing partners will go a long way toward easing Green Mountain’s transition from regional player to international coffee manufacturer. GMCR’s targeted markets have many differences. The road ahead will require adaptation and assistance, especially given the lack of familiarity with the type of product Green Mountain produces. Perhaps that is why GMCR has chosen an array of market types. The lessons learned from the successes and failures in each of these starter markets will make the transition to future markets that much easier.