From Bean to Pod: How K-Cup Piracy is Changing the Coffee Industry

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The coffee industry has been under intense scrutiny in the past few decades because of their widespread impact on the environment at all stages of the supply chain. Deforestation, both for coffee plantations and the manufacture of coffee cups, in addition to the waste generated by numerous coffee chains and cafes around the world, have attracted the majority of this criticism. The coffee industry responded through well-known programs like Fair Trade, Shade Grown, and the C.A.F.E. program, which is used by Starbucks Corp. and other major coffee purchasers. Most coffee companies are now committed to a triple bottom line approach as per consumer tastes, but unfortunately, a new trend of coffee consumption is threatening the environmentally and socially conscious image that the drip coffee industry has worked hard to cultivate.

Pod coffee machines, popularized by manufacturers like Keurig, who patented the K-Cup single use coffee pod in 2006, have now overtaken drip coffee machines in terms of sales, reducing the market share of drip coffee machines to a record low 52% in 2013. Keurig Green Mountain Inc., the company that owns Keurig and manufactures the k-cups used in the machine, reported a profit of $483.23 million last year, which was a substantial gain from its modest 2008 profit of $54.4 million. Industry analysts predict a sales growth for the 2014 fiscal year in excess of 200%, and the pod coffee industry has shown no signs of slowing down.

Consumer demand for fast, fresh coffee that creates minimal waste and requires minimal effort has been responsible for the surging popularity of this new sector of the coffee industry. Consumers cite one of primary reasons for their purchase of a coffee pod machine as the need for only a single cup of coffee, negating the need to brew a whole pot of coffee using a drip coffee machine, which is more wasteful and time-consuming. The primary issue with coffee pods is that only 5% of the single-use cups are recyclable, contributing a great deal of waste in the household waste stream, a problem that was largely avoided with a drip coffee machine. Contrast this to waste from drip coffee, which is compostable.

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The overnight success of coffee pod machines has occurred in both North America and Europe. In 2010, only 4% of American households reported owning a single-use coffee machine; in 2013 that number rose to 13%, and with 83% of Americans reporting that they consume coffee, this number will continue to rise. In fact, K-cups now account for over a quarter of all U.S. ground coffee sales, an increase from the 2010 levels of just 5%. Sales of coffee pod machines have grown from 1.8 million in 2008 to 11.6 million in 2013; a six-fold increase. In European markets, the trend is similar: 2008 sales of coffee pod machines of 6 million are now up to 10 million in 2013, and have actually eclipsed sales of drip coffee machines, which were slightly less at 9.3 million units.

The key issue at play is the backwards-thinking approach taken by k-cup manufacturers: the effort made by the coffee industry to improve their environmental and social image has been essentially nullified by the popularity of the unsustainable k-cup machines. As is often the case in meritocratic societies, a new desirable technology will sell slowly, but sales will quickly accelerate as affordability and market permeability increases. Many k-cup machines have often been attached as giveaway prizes by numerous big box stores, adding to their widespread distribution. In meritocratic societies like North America, citizens want to remain, or at least appear to be, successful; no one wants to be known as a “loser”. This is often established through the purchase of material goods and products, and coffee pod machines are not exempt from this cultural phenomenon.

Coffee pod machines have been appearing not only in homes, but in businesses as well. Employees are no longer tasked with brewing a whole new pot of coffee if they simply want a fresh cup; instead, all they require is their own coffee pod and an ample supply of water in the machine. This increased convenience and efficiency, not to mention the potential for a wider variety of hot beverages, has resulted in many businesses abandoning the traditional drip coffee machine in favour of a coffee pod machine. While the logic behind the purchase and implementation of a coffee pod machine is sound, the increased popularity of these machines has also forced companies who were previously committed to a triple bottom line approach to join in the hype in the hopes of gaining market share.ad95872d-0f4f-4430-8c4e-71b628af88fd

Coffee giant Starbucks, in partnership with Keurig Green Mountain Inc. (KGMI), launched a line of k-cups in 2011, followed by Starbucks’ own coffee pod machine in December 2012. Starbucks is an industry leader in sustainability. They currently procure 98% of its coffee from ethical sources and have implemented recycling programs in 24% of their American stores. Despite this commitment to sustainability and green marketing, Starbucks was forced to compete with KGMI due to the success of coffee pod machines. Many other coffee companies who were previously committed to a triple bottom line approach have also been forced into the coffee pod game, including Nestle, who has sold an estimated 27 billion coffee pods worldwide through their Nespresso line.

the-pirate-organization_cover_harvard-business-review-pressJean-Philippe Vergne is an assistant professor at the Ivey Business School at Western University. He co-authored a book with Rodolphe Durand entitled: “The Pirate Organization: Lessons from the Fringes of Capitalism”. Dr. Vergne describes how the future of many industries has historically been shaped by “pirates”. One of the most famous examples is how Napster forever changed the way music was shared and distributed. Apple has Napster to thank for its iTunes platform, the single most used way to distribute music in history.

Due to the hectic schedules but particular tastes of many coffee-drinking adults, the coffee pod industry has taken a significant share of the market away from drip-coffee products. Based on Vergne and Durand’s argument, the coffee pod industry signals the future of home and office brewed coffee. Unfortunately, while this represents a step forward in terms of convenience and potentially cost, the wide spread adoption of k-cup coffee machines also represents a step backward in terms of environmental stewardship that many coffee companies were working so hard to improve in the past few decades.

Essentially, we are seeing a piracy of the coffee industry by k-cup technology. Like previous examples of industry piracy, the k-cup is a natural evolution of a product pertaining to the new demands of the consumer, even if it might not be in the best interest of the industry as a whole. Recall the Napster example: accessing music for free online was incredibly convenient to the consumer, but the thousands of closing record stores and millions of musicians affected may have a different opinion on the matter. The same goes for the drip coffee companies affected by influx of the k-cup. Presently, there is great pressure to conform or be left behind; the modern businessperson doesn’t have time to brew a fresh pot, but a simple click of a button gets them a great cup of coffee in seconds.

When KGMI’s k-cup patent expired in September 2013, this opened the market up for competitors to produce their own iteration of the coffee pod. As a result, a myriad of imitators flooded the market, producing the jump in 2013 coffee pod sales. With an unregulated commodity gaining so much traction, it is a challenge for the coffee industry to ensure appropriate corporate responsibility with regards product waste.

Conscious-Capitalism

Companies that employ the strategy of “conscious capitalism” (first coined by Whole Foods founder and CEO John Mackey) have traditionally performed better in the 21st century than firms who do not operate by these metrics, which are often based in the triple bottom line approach. By abandoning their core values with the implementation of coffee pods, many companies could create a mixed message for consumers, who may question the values of the company, and this could ultimately alienate many consumers. Honesty and transparency with consumers is one of the key metrics in companies that are heavily embedded in the triple bottom line model, such as Starbucks, so the continued marketing of coffee pod machines may eventually backfire if the market share becomes too large.

Additionally, due to the single-cup nature of coffee pod machines, consumers may begin to abandon their favourite coffee shop in favour of a lower cost option at home or at the office from a coffee pod machine due to consumer behaviour measuring the cost of coffee at a “per cup” level rather than the traditional “by the pound” level. This divided attention may hurt the in-store business of many coffee chains that have invested in k-cup products. The approach to the coffee pod model must be altered if it is to remain sustainable; both from an environmental and business stand point.

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A necessary solution for the k-cup epidemic is to regulate the materials with which coffee pods are manufactured from. Currently, many companies, including KGMI, have detailed sustainability goals listed on their company websites, but these goals and initiatives have been labeled as “green washing” by many critics. An industry-wide regulation on using only recyclable materials would allow for maximum value creation for consumers. While only 5% of coffee pods are currently recyclable, it is entirely plausible to suggest that all pods can be manufactured out of recyclable materials in the near future.

Those opposed to coffee pod machines primarily do so because of the wasteful nature of k-cups. Cost may seem like a deterrent, but 51% of adults aged 18-34 whose annual salary is less than $75,000 get their coffee from a coffee pod machine, compared a slight increase of 64% of adults aged 18-34 whose annual salary exceeds $75,000. Consumer behaviour dictates that the coffee pod machine will continue to gain market share as costs decrease and consumers continue to adapt their morning routine to brewing only a single cup instead of a whole pot of coffee. KGMI predicts that by 2014, almost 25 million American households will have a coffee pod machine.

If recyclable coffee pods are implemented as an industry standard, consumers could be assured that any waste generation from a used coffee pod is only temporary. Until that day comes, this current piracy of the coffee industry will cause many giant companies to rethink their commitment to the environment and sustainable coffee production. It remains to be seen what will emerge out of the piracy of the coffee industry, but if history has taught us anything, it is a necessary step in the evolution of our world.

 

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Boomer Metrics: How Education Became a Best Seller


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Canada was a nation founded on its natural expanse: a sprawling wilderness of massive forests, mountains, and endless prairies. Historically, the Canadian economy was based around our natural resources, but after the Second World War ended in 1945, many Canadians returned to a completely different country. Manufacturing had taken hold in many cities as per the demands of the war, and the economy was rapidly shifting in a new direction. The rapid expansion of the manufacturing sector changed the layout of the residential landscape of the country. The world was stable, trade started occurring on a global scale, and all of those GIs turned skilled workers needed a place to settle with their families. Suburbia was born.

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Post-War Expansion

The invention of the automobile was the key driving force behind urban sprawl and the development of the suburb in post World War II North America. Before technology existed to transport humans quickly and safely over long distances, humans living in urban areas had to inhabit locations relatively close to their job and local amenities. This limited the size of house you could inhabit, as urban areas are very concentrated and densely populated.

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The post World War II economic boom signalled the advent of the suburb, as returning war veterans shared a philosophy of settling down with a family outside of the city, and upon returning home from the war, they now had the money do put that dream in motion. Technology had rapidly advanced during the war, so construction machinery was advanced enough to undertake this task of providing houses for the millions returning home. The governments of Canada and the United States recognized this, and “The American Dream” became a mainstay in North American culture. This signalled the advent of the Baby Boomer generation.

With the jump in technology, cars also became more affordable. Before the United States entered World War II, annual automobile production barely surpassed one million passenger cars. During the war, no automobiles were produced because factory outputs were switched to producing vehicles for the war effort. After the war, automobile production resumed and more than doubled in volume, and continued to rapidly increase into the 1950s. Companies such as Ford and Chevrolet reported record annual production numbers exceeding one million vehicles each. With more cars being sold, this meant that the suburbs became accessible for more people, as the distance outside the city was no longer a factor against owning a house there.

The University Dream

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With the world in relative homeostasis and the economy evolving, higher education became a more important pursuit for many young people to contribute to the quickly changing needs of the world. Potential students’ close proximity to schools combined with their parents’ level of income made university a viable option for those who desired to go. The economy was changing; more young people to be educated leaders of tomorrow to secure the economical future of their nation. As a result of the baby boomers’ higher level of education, a much higher percentage of these individuals were able to secure high-paying jobs and stable careers.

The secret to success was evident: study hard, go to university, land a high-paying job because of your degree, and live the American Dream. Unfortunately, the secret got out. The jobs were lucrative, housing prices were still reasonable, and now everyone wanted their kids to have the same successful life.  A demand for higher education was born.

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In 1980, there were 550,000 undergraduate students in Canada, when only about 10% of the country possessed an undergraduate degree, which equated to just under 2.5 million people. Tuition was also a very affordable $600 (in 2005 dollars). In 1980, the average Canadian per capita income was around $23,000, so tuition cost represented 2.7% of the average Canadian’s income. By 2010, almost 1 million undergraduate students existed in Canada, and 6.8 million Canadians now possessed university degrees. Tuition has soared to a national average of $5,100, while per capita income has only risen to $36,000, which means now tuition is roughly 14% of the average Canadian’s income.

In 1980, minimum wage was $3/hr, but it rose to $3.50 by October, 1981. A student working 40 hours a week in the summer could expect to earn $2240 before taxes, which is almost 4 times the price of tuition. A student working today in Ontario will earn at least $11/hr, which equates to just a shade over $7,000 before taxes, which won’t even cover the average tuition cost of $7,259. Despite this troubling situation, university enrolment has not been affected by rising tuition costs, and universities are constantly expanding their breadth of programs to increase enrolment numbers.

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During the 1960s and 1970s, universities were provided with excellent funding from both the federal and provincial governments. Tuition fees remained low because research and faculty salaries were paid for using the government-provided money. When public funding was pulled, the burden was placed on the public to make up the difference. Tuition went up, but demand was also increasing at around the same time because the promise of a lucrative career was also getting know to the majority of the public. New universities opened, programs expanded, and entire new faculties were added to many universities. What was once a streamlined elite became a turbulent, diluted mess as more spaces opened in universities than the economy demanded their graduates.

In order to keep pace with the rapid expansion of their programs and the further cuts from the government, tuition fees continued to climb, far out-pacing the rate of inflation, but this did not deter bright-eyed youngsters from applying. The idea that a university degree was a golden ticket to living the good life was still engrained in the minds of high school students. Entrance averages to universities soared to newfound heights to help schools discriminate against the throngs of applications each year. High school grades became grossly inflated to ensure that the maximum amount of students were funnelled into the university system. In the 1980s, 20 percent of all students were on the honour roll, but today that number has risen to over 60 percent, and ten percent of all high school students today are graduating with an A+ average. Unfortunately, mental health problems are at an all-time high, and many students are finding it difficult to cope with failure when success is all they’ve known.

UnknownUniversities are doing an excellent job at selling the perceived benefits of getting a degree, and high schools are doing everything in their part to ensure that students have a shot at achieving their dreams. Status is a powerful motivator in our society, and the notion that a university degree can provide that is primarily the reason why so many students are choosing to go that route. In the past, most respectable positions in society did not require a university degree, but the dramatic shift in dominant industry from primary/secondary to tertiary-based jobs changed that. When combined with the hype created by boomers, attending university changed that perception.

The Fallacy of Boomer Metrics

The one confounding mindset that is harming many young people today is the fact that we are basing our metrics for success on those of our parents. Most of our parents raised us to do well in school, get into a good university, and emerge with a piece of a paper and a job. The reality is, this worked 30-40 years ago, but the secret of university got out and the economy rapidly shifted gears, so this metric is outdated as the typewriters our parents used to write essays in school.

It’s the same reason that so many young people are going into so much debt. Our parents bought a car during high school/university because they were cheap, insurance wasn’t a scam, and gas could be purchased for pocket change. A mortgage on a house could be paid off within ten years; now most Canadians are lucky to pay theirs off in thirty. Today, a record number of Canadians are in debt either from school, car payments, their mortgage, or other major purchases, and they are all heavily rooted in Boomer Metrics.

If you talk to your parents about renting a place versus buying, you’ll likely get laughed at. Back in the Boomers’ heyday, renting was seen as a lower status lifestyle and a relatively poor investment. Buying a house was the way to go, since real estate will always be economically en vogue. Thankfully many young people are waking up. Condos, whether the occupant is renting or owning, are more popular than ever in Canada, with Toronto currently holding the title for the most active cranes in the world. People are sick of urban sprawl, and realize that you don’t need a large home to assert your place in the world.

Combined with the move to condos and other high rises, the notion of car ownership is also decreasing among young people in urban areas. Young North Americans are living closer to work, so why bother owning a vehicle that will just collect dust and cost you money? Many cities are becoming more cyclist friendly, and public transit is continually evolving, although Canada has a long way to go.

Harvard-students-leaving--007Despite the fact that two of three major Boomer Metrics are slowly turning over, the one that remains steadfast is that of a university education. Enrolment has not shown signs of slowing, and until young North Americans understand that a university degree is not some golden ticket for life, it will only continue to increase.

When our parents went to school, any degree had the potential to net you a job. Today, the majority of degrees can not promise that. If you critically examine what is going on in the world, you’ll discover a few things:

1) Technology is the one thing that will never stop developing; it is our ability to invent and use tools that makes us human

2) We will never stop building things; humans are creative, expansive species

3) We will need ways to sustain ourselves and keep ourselves alive, whether it be food, health care, or medicine.

4) We need energy to power our world

5) We will always pay taxes

If you look at what degrees are the most employable, you’ll find that the jobs that coincide with the points listed above fall into that category. Millions of students complain about being “underemployed”, but the term underemployment is a myth in itself. We are basing the notion of underemployment on outdated Boomer Metrics. The fact is, many university students were sold a false promise and are just now resenting it. We are entitled to nothing, as our sense of entitlement is based on our parents’ outdated advice. Despite this, a university education will continue to be seen as the only option for some students because of the motivation of status.

What Millennials need to let go of is basing their lives around how their parents grew up. The world has undergone such a dramatic shift that it is foolish to think that we can live like they did. Young Canadians are taking on more debt than their parents in an effort to live (or appear to live) a successful life. Unfortunately, those of us who went to university were raised under enormous pressure to succeed in life. It started with our university applications in high school, and it will continue as long as we keep basing our success on how our parents’ generation defines it. What our parents may have neglected to tell us is that university is more than just a bunch of boring classes and a piece of paper. In order to get the most out of your degree, think about what university actually taught you, and perhaps you’ll find the answer.

“The aim of education is not to fill a bucket; but to ignite a fire. “

-W.B. Yeats.

W.B. Yeats

W.B. Yeats