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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