Single-serve coffee revolution brews industry change

Single-serve coffee pods are the rage, benefiting harried caffeine addicts, the major specialty-coffee companies and many small coffee farmers. But they also carry a hidden price tag and some environmental costs.

By Ángel González

Seattle Times

February 16, 2014

The way America drinks coffee is changing one cup at a time. But that doesn’t mean it’s changing slowly.

Sales of coffee made in single-serve brewing systems, barely noticeable five years ago, now account for more than a quarter of every dollar Americans spend on coffee to drink at home. By 2018, market-research firm Mintel expects consumers to spend nearly as much on coffee pods as they do on bulk coffee.

That’s the result of the unparalleled ease of use offered by the likes of Green Mountain Coffee Roasters’ Keurig K-cups: Push a button, and a high-pressure jet of water pierces a small coffee capsule with a filter. Thirty seconds later, a cup of reasonably good coffee comes out.

“The convenience is amazing,” said John Berger, a 77-year-old Bellevue resident who was recently buying two boxes of Tully’s decaf K-cups at his local Fred Meyer. “You can get a fresh cup each time,” he said, adding that he owns two Keurig machines — one at home, and one at his vacation place in Montana.

The segment’s explosion has wide-ranging implications for consumers, the environment and the coffee business, from farmers to corporate giants such as Seattle-based Starbucks. And now that certain key patents held by Green Mountain have expired, more competitors are jumping into this hot market.

The pods’ rapid growth has surprised even the experts.

“If you’d had asked coffee specialists that this was going to happen, they would have told you, ‘That’s ridiculous,’ ” said Mark Pendergrast, author of “Uncommon Grounds,” a prominent book about the coffee industry.

Pendergrast, a coffee fanatic who prefers grinding his own beans, said this quick-brewing method is “not as good as your old French press or pour over, but it’s good.” He said he owns a Nespresso single-serve espresso maker that he brings out at parties.

The convenience does come at a price. At about 65 cents per cup, that Nespresso coffee costs about $59 per pound.

That doesn’t bother customers like Berger, who said a cup of freshly brewed, robust coffee from a pod is still far cheaper than going to Starbucks.

But it means enormous profits for the biggest peddlers of single-serve pods — especially for Vermont-based Green Mountain, which has seen sales multiply almost twentyfold since its 2006 takeover of Keurig.

Its association with Keurig has been so successful that last month the company asked its shareholders to approve a new moniker: Keurig Green Mountain.

Starbucks, in the midst of a five-year partnership with Green Mountain, is also a big player in the field, claiming about 15 percent of the premium single-serve market with its K-cups.

It also markets its own Verisimo coffee-pod machine, which does espresso and brewed coffee, using a different capsule incompatible with the Keurig system.

Starbucks Chief Operating Officer Troy Alstead said last month in an earnings call that the segment “will be an important driver of our long-term growth.”

Critics have pointed out that the used capsules are difficult, if not impossible, to recycle. Some manufacturers have set up proprietary-recycling programs, while acknowledging there’s much work to be done.

But that hasn’t impeded the sector’s growth. In fact, newcomers are crowding in, especially since the recent expiration of patents protecting the K-cup opened the gates to competitors.

Renton-based Distant Lands Coffee, a privately held roaster that sells to private-label brands such as Safeway, in 2012 launched a venture that came up with a coffee pod compatible with the K-cup system, but with its own modifications.

The subsidiary, dubbed Tazza Pronto, built a multimillion dollar facility in Tyler, Texas, and in late 2013 launched its first product, a pod made for casual fast-food brand Panera Bread. The company plans to eventually churn out a billion of the little capsules per year.

“The idea of having to be in that market was a foregone conclusion,” said Bill Meissner, Tazza Pronto’s chief executive. “The growth rate is stunning.”

He acknowledges, however, that it’s challenging to fight “large and entrenched players.”

Rapid expansion

Single-serve brewing systems began appearing in kitchens and offices in the 1990s and were becoming popular in Europe through giants like Nespresso, but it wasn’t until Green Mountain’s purchase of Keurig that they hit their stride in the U.S. The K-Cup, which Keurig launched in 1998, is now the U.S. market leader.

The format’s success is partly due to good timing: Starbucks accustomed consumers to the idea of ordering a single cup of coffee, chosen from a wide variety of beans, said Jenny Zegler, an analyst with Mintel, the market-research firm.

Keurig also engaged in aggressive promotion and discounting, and the recession helped increase the machines’ popularity, said Zegler. Even though single-serve coffee is more expensive per pound than drip coffee, it’s cheaper than a coffee-shop run.

One out of 5 adults recently polled by the National Coffee Association had drunk coffee made in a single-cup brewer the day before, up from 1 in 14 in 2010. That makes it the second most-popular brewing method after drip coffee, far surpassing instant coffee and espresso machines.

Mintel says that in 2013, U.S. consumers bought $3.1 billion worth of coffee pods — versus $132 million in 2008. In comparison, Americans last year bought $6 billion worth of traditional roasted coffee, and about $2.5 billion in instant and ready-to-drink coffee. The market-research firm expects the gap between single cups and bulk coffee to shrink to $1.4 billion by 2018.

Starbucks was a relative newcomer to the coffee-pod market, striking a deal with Green Mountain to launch Starbucks brand K-cups in late 2011. But the little cups are now a critical part of Starbucks’ strategy to dominate grocery-store aisles. Starbucks said its K-cup sales in December were up 65 percent from the previous year.

Starbucks downplays any fears of single-serve cups eating into its core cafe business, as both “fit into our customers’ daily routine,” a spokeswoman said.

Nespresso, part of Swiss giant Nestlé, is also expanding aggressively. Unlike the K-cup, which yields brewed coffee, its systems prepare espressos and are showcased in high-end boutiques in New York and San Francisco.

Nespresso has also become a weighty force in the global-coffee market, fighting Starbucks and Green Mountain for high-quality beans.

Trickling down effect

The proliferation of coffee pods means there’s more global appetite for the high-quality Arabica coffee generally used in them. That has helped farmers focusing on quality beans, partially offsetting the effects of a recent bust in coffee prices.

Green Mountain has a well-established reputation as an ethical coffee buyer. The company bought some 50.9 million pounds of Fair Trade-certified coffee in 2012 to feed its growing K-cup business, more than double the amount it bought in 2010. That makes it the world’s largest purchaser of the certification, which guarantees farmers better labor and environmental conditions and better prices.

Lindsey Bolger, director of coffee sourcing and relationships at Green Mountain, said that a decade ago the company sourced from 14 regions around the world; now they have added about 12 new regions, including western Uganda and Peru. “Success has enabled us to widen our impact with the coffee-producing community,” she said.

Michael Sheridan, head of the Catholic Relief Services’ Borderlands Coffee Project, which seeks to help small farmers increase the productivity and quality of their coffee, says most of the coffee grown in Nariño, a Colombian region known for high-quality coffee, goes to Nespresso because it pays top dollar.

“In the three years I have been working there, Nespresso’s AAA program has consistently delivered the highest prices,” Sheridan said, referring to the company’s sustainable-quality program. Nespresso says its program pays 30 percent to 40 percent above standard market price.

Beyond coffee

The pod isn’t done expanding its reach.

In addition to coffee, Green Mountain and Starbucks market different varieties of K-cup tea. Hot apple cider is available in K-cup format, and this year, Campbell Soup Co. will sell its famous soups in a K-cup.

The single-serve revolution is also extending to the realm of soda: This month Coca-Cola inked a 10-year pact with Green Mountain that will make Coke an exclusive provider to Keurig’s forthcoming cold-beverage pod system.

As part of the deal, Coke also bought a 10 percent stake in the company for about $1.25 billion. The news sent Green Mountain stock soaring — shares got a 27 percent bump in the aftermath of the announcement.

It seems single-serve brewing is destined to join the microwave as an essential appliance, said Zegler, the Mintel analyst.

“This is more than just another fun tool for a household to play with,” she said.

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Ángel González; 206-464-2250 or agonzalez@seattletimes.com. On Twitter: @gonzalezseattle