Case 36: Green Mountain Coffee Roasters and Keurig
Coffee*
On March 10, 2011, Starbucks and Green Mountain Coffee Roasters (GMCR) announced the
formation of a strategic relationship for the manufacturing, marketing, distribution, and sale of
Starbucks and Tazotea branded K-Cup portion packs for use in GMCR’s Keurig single-cup
brewing system. The new relationship was designed to provide owners of Keurig single-cup
brewers with the additional choice of Starbucks-branded super-premium coffees for their
brewers. This strategic relationship furthered Starbucks’s stated goals of expanding its presence
in premium single-cup coffee, making its premium coffees conveniently available to consumers
whenever, wherever, and however they wanted it. Howard Schultz, president, CEO, and
chairman of Starbucks Corporation stated,
Today’s announcement is a win for Starbucks, a win for GMCR and most importantly a win for
consumers who want to enjoy Starbucks coffee with the Keurig Single-Cup Brewing system. Our
research shows that more than 80 percent of current Starbucks customers in the U.S. do not yet
own a single-cup brewer and our relationship will enable Starbucks customers to enjoy perfectly
brewed Starbucks coffee at home, one cup at a time.
Jeff Hansberry, president, Starbucks Global Consumer Products Group, added, “We are proud to
be the exclusive super-premium licensed coffee brand produced by GMCR for the Keurig
Single-Cup Brewing system, and we are looking forward to working with our colleagues at
GMCR to further accelerate growth in single-serve coffee.” Lawrence J. Blanford, GMCR
president and CEO stated, “This relationship is yet another example of GMCR’s strategy of
aligning with the strongest coffee brands to support a range of consumer choice and taste profiles
in our innovative Keurig Single-Cup Brewing system.”1
GMCR appeared on a roll with the Starbucks development following similar news in February
with Dunkin’ Donuts announcing a promotion, manufacturing, and distribution agreement
making Dunkin’ Donuts coffee available in single-serve K-Cup portion packs for use with
Keurig Brewers.2 Beginning in the summer of 2011, Dunkin’ Donuts will offer 14-count boxes
of Dunkin’ Donuts coffee in single-serve K-Cup portion packs exclusively at participating
Dunkin’ Donuts restaurants in the United States and Canada. GMCR will exclusively package
the new Dunkin’ K-Cup portion packs using coffee sourced and roasted to Dunkin’ Donuts
exacting specifications. Nigel Travis, Dunkin’ Brands CEO and Dunkin’ Donuts president stated,
We believe customers will be delighted to learn that ‘America’s Favorite Coffee’ will soon be
able to be prepared in America’s fastest-growing single-cup brewing system. By introducing
Dunkin’ K-Cup portion packs and making them available exclusively in our restaurants, we are
giving people more occasions to enjoy Dunkin’ Donuts coffee and more ways to enjoy using the
Keurig Single-Cup Brewing System. We believe this alliance of two brand leaders means
incremental sales of GMCR, for Dunkin’ Donuts and for our Dunkin’ Donuts franchisees.
GMCR president and CEO Larry Blanford stated,
Dunkin’ Donuts has top quality coffee, an extremely loyal customer base and impactful
advertising programs. Combine those assets with consumers’ enthusiastic response to Keurig’s
Single-Cup Brewing technology and we believe this alliance represents a truly exciting
opportunity for both companies, with the potential to strengthen Keurig brewer adoption by
consumers in one of the fastest-growing categories of the coffee industry.
According to The NPD Group/CREST, Dunkin’ Donuts served the most hot traditional and iced
coffee in America (for quick-serve restaurants, year ending October 2010), selling more than one
billion cups of hot and iced coffee every year. Dunkin’ Donuts was recently ranked number one
in customer loyalty in the coffee category for the fifth consecutive year by the 2010 Brand Keys
Customer Loyalty Engagement Index. Additionally, in 2010 Dunkin’ Donuts opened more net
new locations globally than any other quick-serve brand.
While Wall Street rewarded the stock price of GMCR on the news of the strategic relationships,
Larry Blanford could not ignore the risks related to GMCR’s Keurig business. Although GMCR
was based in Waterbury, Vermont, with a geographic footprint weighted almost exclusively to
the U.S. and Canada, several global developments posed risks to Keurig’s future growth.
Blanford was concerned about several issues. including product liability, protecting GMCR’s
intellectual property, GMCR’s ability to integrate their acquisitions, and the effect of commodity
costs on Keurig brewers.
Coffee Consumption in the United States
The U.S. population consumed more coffee than soft drinks in 1969. According to Jack Maxwell
of Beverage Digest, U.S. consumption of coffee in 1969 was approximately 40 gallons per capita
versus 20 gallons of soft drinks. By 1998, coffee consumption had fallen to 20 gallons per capita
annually compared to more than 50 gallons of soft drinks consumed. But consumer preferences
can and did change, responding to the availability of higher-quality coffee by drinking more
coffee and reversing a three-decade decline. The National Coffee Association conducted a
survey revealing that 80 percent of Americans drink coffee occasionally and over 50 percent
drink coffee daily. The U.S. per capita consumption of coffee was estimated to be 424 servings,
which included in-home and out-of-home consumption of roast, ground, instant, and ready-todrink (bottled/canned) coffee.3 While the average consumption per drinker rose to over three
cups per day, 18- to 24-year-olds who drink coffee averaged 4.6 cups per day, whereas those
over 60 years old averaged only 2.8 cups per day.4
The total coffee market in 2010 was estimated to be 105 billion cups or $34 billion (see Exhibit
1).5 Specialty coffee has become a mainstream staple as younger drinkers have come of age with
Starbucks virtually omnipresent. Given the proliferation of specialty coffee and a palate less
tolerant of Robusta coffee from a can, the Millennial Generation provides a robust outlook for
specialty coffee demand (see Exhibit 2).
Exhibit 1: Total U.S. Coffee Market Value
Exhibit 2: Coffee Preference Percentages by Age
Source: National Coffee Association, 2010 Drinking Trends.
The Keurig K-Cup Single-Serve Brewing System
Keurig single-serve systems are designed to quickly brew a single cup of coffee, tea, hot
chocolate, or other hot beverage such as apple cider. The coffee grounds or other brew material
are supplied in a prepared, single-serving unit called a “K-Cup.” Once the brewer has warmed
up, the Keurig user inserts a K-Cup into the brewer, places a mug under the spout, and invokes
the brew feature. Within 20 to 60 seconds, the beverage is brewed. Keurig machines brew by
piercing the foil seal on top of the plastic K-Cup with a spray nozzle, while simultaneously
piercing the bottom of the K-cup with a discharge nozzle. Grounds contained inside the K-cup
are embedded within a paper filter. A measured quantity of hot water is forced through the KCup, passing through the brew material and the filter into a cup or mug. A brewing temperature
of 192 degrees Fahrenheit (89 Celsius) is the default setting, with some models permitting users
to reduce the temperature per preference.
“Pod” Brewing Market
The Keurig brewer utilizes patented, innovative brewing and single-cup technology to deliver a
fresh-brewed cup of coffee, tea, or cocoa at the touch of a button. Brewers with Keurig Brewed
technology were the top five selling coffeemakers in the United States on a dollar basis for the
period of October through December 2010 and represented 49 percent of total coffeemaker
dollar sales for that period according to the NPD Group. At the KeyBanc Capital Markets
investor presentation, Larry Blanford reported that Keurig brewer and accessories sales increased
58 percent in the first quarter of 2011 versus first quarter 2010. During this same time period, KCup portion pack net sales increased 89 percent to $332.9 million. As a percentage of total
coffeemaker dollar sales, Keurig’s percentage has increased quarter on quarter every quarter
since 2007 (see Exhibits 3-6).
Exhibit 3: GMCR Keurig Percentage of Total Coffeemaker
Dollar Sales, 2007-2010
Source: NPD Group.
Note: Includes all coffeemakers and espresso makers. NPD data do not include all retailers and are estimated to
represent 35 percent to 40 percent of the total marketplace.
Exhibit 4: Green Mountain Coffee Roasters Income
Statement
Source: Yahoo Finance
Exhibit 5: Green Mountain Coffee Roasters Balance Sheet
Source: Yahoo Finance
Exhibit 6: Segment Summary
Specialty Coffee business unit(SCBU): Sources, produces, and sells more than 200 varieties of
coffee, cocoa, teas, and other beverages in K-Cup portion packs and coffee in more traditional
packaging, including whole bean and ground coffee selections in bags and ground coffee in
fractional packs, for use both at-home (AH) and away-from-home (AFH). In addition, SCBU
sells Keurig single-cup brewers and other accessories directly to consumers and to supermarkets.
Keurig: Sells AH single-cup brewers and accessories and coffee, tea, cocoa, and other beverages
in K-Cup portion packs produced by SCBU and other licensed roasters to retailers by principally
processing its sales orders through fulfillment entities for the AH channels. Keurig sells AFH
single-cup brewers to distributors for use in offices. Keurig also sells AH brewers, a limited
number of AFH brewers and K-Cup portion packs directly to consumers via its website,
www.keurig.com.
Source: GMCR 2010 annual report.
While the coffeemaker category sales excluding Keurig declined over 5 percent in 4Q 2010
versus 4Q 2008, sales of the Keurig brewers actually increased over 400 percent during the
period, fueling total category dollar sales growth in excess of 53 percent for the period. As of
year-end 2010, Keurig and Keurig-licensed brewers were approaching the point where sales
would account for over 50 percent of total coffeemaker category sales (see Exhibit 7).
Exhibit 7: Total Coffeemaker Dollar Sales, October–
December 2008 through October–December 2010 (in
millions)
Source: NPD Group.
Note: Data include third-party brewers. “Total coffeemaker” category includes all coffeemakers and espresso
makers. NPD data do not include all retailers and are estimated to represent 35 percent to 40 percent of the total
marketplace.
During the first quarter of 2011, Keurig-branded brewers continued to gain market share in the
coffeemaker category. According to NPD, in GMCR’s fiscal first quarter, Keurig-branded
brewers (without third-party brewers) remained the number one dollar-share leader in the U.S.
coffeemaker category, with the four top-selling brewers and over 45 percent dollar share,
compared to 36.4 percent a year ago. For the same fiscal first quarter 2011 period, NPD
estimated that, including third-party Keurig-branded brewer sales, Keurig brewers represented
49.3 percent of total coffeemaker dollar sales. In Canada, Keurig brewers (without third-party
brewers) were the second leading dollar-share leader of all coffeemakers, with the brand
increasing its dollar share to 14.6 percent in GMCR’s fiscal first quarter 2011 from 8.1 percent in
2010. On a unit basis, Keurig-branded brewers (without third-party brewers) gained ground,
increasing share to 6.8 percent in 2011 from 3.2 percent in 2010 for all coffeemakers.
Approximately 18.5 million coffee brewers were sold each year in the United States, and
Keurig’s goal was to convert over half of the 90 million American homes with coffee brewers to
Keurig.6 As recently as 2007, research by the NPD Group indicated that the single-serve
proposition wasn’t compelling enough for consumers to replace their existing coffeemakers with
pod machines. NPD’s research indicated that a significant proportion of purchasers were
unsatisfied and cited unreliable machines as a problem as well as the coffee itself. The pods
available, consumers complained, were pricey, often hard to find, and limited in terms of flavor
and blends. In their survey, the NPD Group found some consumers were dissatisfied with the
performance of pod machines, with 17 percent of machines returned, thrown out, or given away.
John Block, director for the NPD Group, said, “Manufacturers and retailers have a great
opportunity to improve their position in the marketplace by listening to consumer feedback, and
integrating all three attributes that customers want most into their product offering: a reliable pod
machine, easy-to-find refills, and a variety of coffee flavors.”7
A Multichannel Strategy for the Away-from-Home (AFH)
Market
Keurig initially focused on the AFH commercial segment of office users. Increasing demand and
brand awareness enabled Keurig to pursue a multichannel strategy, providing widespread
exposure to consumer trial. Starbucks and other specialty coffee purveyors laid the groundwork
for launching into the AFH office coffee service (OCS) market by educating consumers about
gourmet coffee and moving coffee beyond a commodity. Starbucks may be responsible for a
paradigm shift regarding the price elasticity for coffee. The paradigm that applied to price
elasticity affecting consumer purchases of Robusta coffee by the can shifted with the
proliferation of fresh-ground Arabica beans served in a coffeehouse, often for $2 or more per
cup. This paradigm shift enabled Keurig to offer a single-cup brewing system into offices,
capitalizing on consumer demand to replicate their coffeehouse quality java in the office.
There were approximately 2.6 million coffee brewers in offices nationwide serviced by a
network of approximately 1,700 distributors. Of those offices, GMCR estimated that 12 percent
had single-cup brewers, and about half of those were Keurig brewers.8 While Keurig brewers
were estimated to be in 30 percent of offices in New England, national penetration in the office
channel was only about 6 percent.
Keurig continued working with its network of Keurig Authorized Distributors (KADs) to execute
office acquisition plans, conduct lead generation, demonstrations, and sampling programs to
build Keurig’s office coffee business. In addition to Keurig’s traditional distributor network,
customers such as Office Depot and Staples were helping Keurig grow through their business-tobusiness solutions for both large and small office applications.
Another AFH single-serve opportunity Keurig identified was the hotel market. There were
approximately five million coffeemakers in hotel rooms across North America. Keurig believed
that 40 percent of these rooms catered to travelers who would appreciate the benefits of singleserve brewing. The Keurig team went through a rigorous process to develop new brewer
concepts for the market. The development of a new “hotel in-room” brewer was one example
(see Exhibit 8).
Exhibit 8: Keurig “Hotel In-Room” Brewer
Single-Cup Brewer System Competition
Consumers had many options of single-cup brewing systems to choose from in North America
and internationally. Competition in the single-cup brewing system market was increasing, as
relatively low barriers to entry encouraged new competitors to enter the market, particularly with
typically lower-cost brewers that brewed coffee packaged in nonpatented pods. Many current
and potential competitors had substantially greater financial, marketing, and operating resources
versus Keurig. According to Keurig, their primary competitors were Flavia Beverage Systems
(manufactured by Mars), the Tassimo beverage system (manufactured and marketed by Kraft),
the Senso brewing system (manufactured and marketed by Philips and Sara Lee), and a number
of additional single-cup brewing systems and brands. Kraft’s Tassimo system was made
primarily for at-home use, while the Mars’s Flavia system targeted offices.
A January 2009 Consumer Reports article on coffeemakers covered pod machines. The article
stated, “With pod machines, you simply drop in a sealed packet of coffee—no grinding, no
scooping, and no mess. But many lock you into the company’s coffee, which tends to be pricey,
and the results have been unimpressive.” According to Consumer Reports, “Cuisinart’s Cup-OMatic SS-1, $200, did best among the pod models tested. It took standard pods or your own grind
and lets you pick regular or bold in five cup sizes. It was reasonably quick: about three minutes
for the first cup, one minute thereafter. But the model occasionally leaked extra water into the
cup, diluting the coffee.” Consumer Reports also tested the Keurig Breville BKC600XL, $300.
Consumer Reports commented that the Keurig machine, “accepts any K-cup as well as loose
coffee grounds. It was fairly quiet but that first cup takes almost four minutes.” Consumer
Reports recommended, “If you want coffee for one in a hurry and you insist on the neatness and
convenience of a pod machine, consider the Cuisinart for its flexibility and speed. Otherwise, we
recommend our top-scoring to-go model, the Melitta Take2 ME2TM. It’s quick, brewed
superbly, and costs just $25.”
The History of Keurig
Named for the Dutch word for excellence, Keurig was launched in 1990 by Peter Dragone and
John Sylvan, with the belief that coffee should always be served fresh, whether at home or at the
office, just as in a gourmet coffeehouse. Dragone and Sylvan noticed that people were leaving
the office in search of a fresh cup of coffee and asked themselves, “Why do we brew coffee by
the pot when we drink it by the cup?” From this question, the revolutionary concept of Keurig KCup portion pack brewing was born. In 1994 Keurig secured a patent and came up with a
prototype. Two venture capital firms kicked in $1 million and gave Dragone and Sylvan one year
to prepare a model for mass production. When they missed that deadline, the venture capitalists
offered more money but demanded that Nick Lazaris, a veteran executive who once served as
chief of staff to West Virginia Governor (now Senator) Jay Rockefeller, be brought on. In 1998,
after eight years of development, Keurig released an industrial-strength, single-serve machine
that delivered a perfect cup of coffee or tea every time.
Keurig was a technology company in the coffee industry. Keurig brewers represented a fusion of
technology and design. To maintain and enhance its position as a leader in the gourmet single-
cup market, Keurig invested significant resources and capital in engineering and research and
development. This led to a strong and growing portfolio of market-leading, proprietary
technology. Keurig’s integrated engineering team drove fast and innovative product development
in all three areas that supported Keurig’s single-cup system: brewers, portion packs, and highspeed packaging lines that manufactured the portion packs. Keurig’s integrated approach to newproduct development resulted in accelerated new-product launches since 2004. Keurig employed
over 30 degreed engineers from varied disciplines. The engineering team at Keurig included
mechanical, software, and nutritional science, as well as quality assurance and industrial
engineering. As of 2007, Keurig held 26 U.S. and 65 international patents covering a range of its
portion packs, packaging line, and brewer technology, and Keurig had additional patent
applications in process. Of these, 72 were utility patents and 19 were design patents. The Keurig
system was based on three fundamental elements:
1. A patented and proprietary portion-pack system (“K-Cup”) using a specially designed filter,
sealed in a low-oxygen environment to ensure freshness (see Exhibit 9).
Exhibit 9: The Keurig K-Cup
 2. Specially designed, proprietary high-speed packaging lines that manufactured K-Cups at
the coffee roaster’s facilities using fresh roasted and ground coffee (or tea)
 3. Brewers that precisely controlled the amount, temperature, and pressure of water to provide
a consistently superior cup of coffee or tea in less than a minute when used with K-Cups.
Keurig’s patented system eliminated the need to measure coffee or water—the two primary
culprits for suboptimal java. With the Keurig system, pressurized hot water was filtered through
a small plastic pod, called a K-Cup, that combined both filter and coffee (see Exhibit 10).
Exhibit 10: Normal versus Injection Brewing Process
Keurig maintained a sizeable quality control team to assist engineering in establishing quality
standards; to communicate standards to all manufacturing partners, roasters, and suppliers; and to
audit compliance with Keurig’s established standards. This emphasis on quality products, easyto-use features, and innovative technologies earned Keurig high marks in customer satisfaction,
with 94 percent customer satisfaction from tracked brewer purchasers.
A licensing agreement enabled Green Mountain Coffee Roasters to package its high-quality
Arabica beans in Keurig’s patented container, the K-Cups. GMCR started distributing the new
single-cup Keurig Premium Coffee System to office-coffee-service (OCS) and food-service
providers in 1998. GMCR and Keurig sold the system through select distribution channels. The
system featured the single-cup Keurig brewer and eight varieties of Green Mountain coffee,
including blends, flavored, decafs, and estate coffees. Keurig’s K-Cup packaging guaranteed that
each cup of coffee was as fresh as “the first cup of every pot.” Keurig’s strategy to gain market
share in the office market was to sell machines to distributors and encourage them to give the
machines away or lease them for a small fee. The economics of the strategy worked for
distributors, because the real profit was in selling K-Cups. If an office went through 30 or 40 KCups per day, a distributor recouped the cost of the machine in less than six months of K-Cup
sales.
When Keurig launched its first single-cup brewer for the office market in 1998, it partnered with
Green Mountain Coffee to manufacture and sell Keurig’s patented K-Cups. Although Green
Mountain Coffee was the first roaster to sell its coffee in Keurig’s single-cup brewing system, by
2003 GMCR was competing for Keurig’s sales with three other North American roasters:
Diedrich Coffee, Timothy’s, and Van Houtte, a vertically integrated roaster and office coffee
distributor in Canada and the United States. Since 2003, Keurig had licensed several additional
coffee roasters to package gourmet coffee and teas into K-Cups, all of whom paid royalties to
Keurig based on the number of K-Cups shipped. For each K-Cup shipped, roasters paid Keurig a
royalty of approximately $.04. This unique licensing agreement system enabled Keurig to offer
the industry’s widest selection of gourmet branded coffees and teas in a proprietary single-cup
format. This wide coffee selection proved to be a key differentiator for Keurig’s brewing system.
Consumers could choose from 11 gourmet brands and over 130 varieties of coffees and teas in
K-Cups. Of the more than 2 billion cups of Keurig brewed coffee and tea that had been
consumed since Keurig launched in 1998,9 Green Mountain Coffee continued to be the leading
K-Cup roaster, representing 57 percent of K-Cups shipped in fiscal 2008.10
In 1998 GMCR held a minority investment of less than 5 percent in Keurig Inc. This partnership
with Keurig developed into an important growth driver in fiscal 2000, as the unique Keurig onecup brewing system gained momentum in the marketplace. K-Cup sales made up 15.7 percent of
total sales at GMCR in fiscal 2000. GMCR’s partnership with Keurig Inc. continued to be an
important growth driver in fiscal 2001, with K-Cup sales comprising 20.4 percent of total
revenue for GMCR. Keurig’s ownership structure changed in 2002 as a result of agreements with
GMCR and Van Houtte. Keurig sold stock to Van Houtte, raising $10 million to seed Keurig’s
at-home business launch. The investment secured Van Houtte a 28 percent ownership position in
Keurig. Simultaneously, GMCR invested $15 million, by acquiring and executing stock options,
to purchase 42 percent of Keurig. These strategic moves resulted in GMCR and Van Houtte
joining Memorial Drive Trust (MDT) as the top three shareholders of Keurig. MDT, an
investment advisory firm, had been the primary venture investor in Keurig since 1995 and led
Keurig’s board of directors. Separate shareholder agreements with MDT, however, restricted
both GMCR and Van Houtte from holding a seat on Keurig’s board of directors. However, in
June 2006, GMCR completed its acquisition of Keurig for $104.3 million.
Expanding Keurig’s Family of Brands
In addition to Green Mountain Coffee and GMCR’s affiliated Newman’s Own Organics and
Celestial Seasonings Tea brands, which were packaged and sold by Green Mountain Coffee,
Keurig’s other North American K-Cup brands offered as of year-end 2006 included Diedrich,
Gloria Jean’s, Coffee People, Timothy’s, Emeril’s, Van Houtte, Bigelow, Tully’s, and Twinings.
In January 2007, Keurig Inc. and Caribou Coffee, the second largest publicly traded gourmet
coffee company in the United States in terms of number of retail stores, announced a partnership
to market Caribou’s gourmet coffees in Keurig K-Cups. “We are proud to welcome Caribou to
the Keurig family,” stated Nick Lazaris, former president of Keurig. “Caribou is an exceptionally
strong brand with a loyal following among gourmet coffee lovers. Our office and home Keurig
users will be delighted with Caribou in K-Cups.”11 Under license from Caribou Coffee, Keurig
served as the wholesale distributor and a direct retailer for Caribou Coffee K-Cups. In addition,
many Keurig premium retail partners added Caribou Coffee K-Cups to the selection of K-Cups
already carried in 6,700 stores coast to coast. For the office coffee channel, Caribou Coffee KCups were offered through Keurig’s authorized distributors for marketing to offices where
Keurig brewers were installed. Caribou marketed both Caribou Coffee K-Cups and Keurig
brewers in many of its coffeehouses.
As Keurig gained momentum across the United States, the diversity of the K-Cup brand portfolio
increased in importance because regional preferences could not be underestimated as national
penetration progressed. The addition of Caribou Coffee, a strong Midwest brand, helped build KCup sales and introduce Green Mountain Coffee to areas beyond its core market.
In September 2008 GMCR announced an asset purchase agreement to acquire the Tully’s coffee
brand and wholesale business. Tully’s was a well-respected specialty coffee roaster with Pacific
Northwest roots and heritage. The Tully’s wholesale business division distributed coffee to over
5,000 supermarkets, located primarily in the western states, and also sold coffee in K-Cup
portion packs. The Tully’s acquisition was designed to provide GMCR with a complimentary
West Coast brand and business platform to facilitate future geographic growth and brand
expansion. In March 2009 GMCR completed the acquisition of the Tully’s Coffee brand and
wholesale coffee business from Tully’s Coffee Corporation for the purchase price of $40.3
million. GMCR financed the purchase through its existing $225 million senior revolving credit
facility. Larry Blanford stated, “This acquisition strengthens our leadership in specialty coffee
and will support our plans to establish our proprietary Keurig Single-Cup system as the preferred
way to enjoy coffee throughout North America.” Tully’s retail locations continued to operate
under license and supply agreements with GMCR. Tully’s retail and international business
remained an independent company, operating under the name of TC Global Inc., owned by its
existing shareholders and managed by its existing management team.
In November 2009 GMCR announced the acquisition of Timothy’s Coffees of the World Inc. for
a cash purchase price of approximately $157 million, in U.S. dollars. The acquisition included
the Timothy’s World Coffee brand and wholesale business (but did not include retail operations)
and was maintained as a wholly owned Canadian subsidiary, with operations integrated into
GMCR’s Specialty Coffee Business Unit. Headquartered in Toronto, Ontario, Timothy’s was a
premium coffee company that produced specialty coffee, tea, and other beverages in a variety of
packaged forms. Additionally, Timothy’s produced K-Cup portion packs for the Keurig singlecup brewing system sold under the Timothy’s World Coffee, Emeril’s, and Kahlua Original KCup brands. Timothy’s became a licensed roaster of Keurig Inc., a wholly owned subsidiary of
GMCR, in 2000. Regarding the acquisition, Larry Blanford stated,
Timothy’s is a great addition to GMCR’s family of brands. We have been collaborating together
since they became a Keurig licensee and know the company is a great strategic and cultural fit.
We believe that Timothy’s, along with our Green Mountain Coffee brand, will contribute
meaningfully to our future success in Canada and throughout North America. It will accelerate
GMCR’s geographic expansion with a Canadian brand platform that includes manufacturing and
distribution synergies. The retail portion of the Timothy’s business has been purchased by
Bruegger’s Enterprises, Inc. and will continue to support the Timothy’s brand across Canada.
Our acquisition includes a five-year coffee supply agreement with Bruegger’s Canadian affiliate
and we look forward to our expanding relationship with them as we already supply all of their
290 locations in the U.S.… Timothy’s wholesale business and brand is a landmark international
acquisition for GMCR—representing the accomplishment of a key goal: to further optimize the
Keurig opportunity and our family of brands across North America.
In May 2010 GMCR announced that it had acquired Diedrich Coffee Inc. for $35 per share of
common stock in cash, pursuant to a cash tender offer and a “short form” merger, in a transaction
with a total value of approximately $300 million. Diedrich Coffee became a wholly owned
subsidiary of GMCR and was integrated into GMCR’s Specialty Coffee business unit. Diedrich
Coffee specialized in sourcing, roasting, and selling the world’s highest quality coffees. The
company marketed its three leading brands of specialty coffees, Diedrich Coffee, Coffee People,
and Gloria Jean’s Coffees, through office-coffee-service distributors, restaurants, and specialty
retailers and via the company’s web stores. Diedrich Coffee was one of the few roasters under
license to produce K-Cups for Keurig’s top-selling single-cup brewing system. Regarding this
acquisition, Larry Blanford stated,
By taking the next logical step beyond our already successful licensing agreement with Diedrich
Coffee, we are bringing in house three strong, complementary brand platforms—Diedrich, Gloria
Jean’s and Coffee People—and augmenting the growing GMCR beverage brand portfolio. In
addition, we are gaining manufacturing and distribution facilities in California, which will enable
us to more effectively, reach consumers in this region.
The combined company operated manufacturing and distribution facilities in Waterbury and
Essex, Vermont; Castroville, California; Knoxville, Tennessee; Sumner, Washington; and
Toronto, Ontario. GMCR also announced that it amended its Amended and Restated Revolving
Credit Agreement to provide for a new term loan for $140 million, a new uncommitted revolver
increase option of up to $100 million, and increases in the permitted amounts of certain forms of
indebtedness and investments. In connection with the closing, GMCR executed the $140 million
new term loan to pay for a portion of the Diedrich Coffee acquisition purchase price.
In December 2010 GMCR announced that it had successfully completed its acquisition of LJVH
Holdings Inc. (“Van Houtte”) for an aggregate cash purchase price of CAD $915 million, or
USD $905 million, subject to adjustment for final exchange rate and future adjustment based on
Van Houtte’s working capital, net indebtedness, and pre-closing taxes as of immediately prior to
the acquisition’s closing. Headquartered in Montreal, Quebec, Van Houtte was a leading
gourmet coffee brand in Canada in the home and office channels. Van Houtte’s last 12 month’s
net sales were CAD $445 million as of August 21, 2010, or approximately USD $433 million
based on the exchange rate as of September 13, 2010. Van Houtte roasted and marketed gourmet
coffee for home and office consumption and distributed it through Van Houtte’s direct-to-store
delivery and coffee-services networks in Canada and the United States. GMCR expected to
continue operations from Van Houtte’s location in Montreal, Quebec, under the leadership of
Gerard Geoffrion, Van Houtte’s president and CEO. Van Houtte’s Canadian brands included
Van Houtte, Brûlerie St. Denis, Les Cafés Orient Express Coffee, and Brûlerie Mont Royal. Van
Houtte also produced K-Cup portion packs for the Keurig single-cup brewing system under the
Van Houtte, Bigelow, and Wolfgang Puck K-Cup brands. Regarding the acquisition, Gerard
Geoffrion, Van Houtte president and CEO stated, “As a result of our long-term relationship as a
Keurig licensee, we know there is a strong cultural and strategic fit between GMCR and Van
Houtte. We believe the combination of our brands, employees and our respective geographic
strengths makes for a stronger overall company and will enable us to continue to grow our
presence in Canada.” Larry Blanford stated, “We are very pleased to welcome Van Houtte and
its approximately 1,800 employees into the GMCR family. We are confident that Van Houtte,
with its well-known portfolio of brands and strong management team, will help drive GMCR’s
future success in Canada and throughout North America.” GMCR financed the Van Houtte
acquisition through a combination of cash on hand and new debt financing. GMCR entered into
$1.45 billion in senior credit facilities, consisting of:
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
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1. A term loan A facility in an aggregate amount of $250 million,
2. A term loan B facility in an aggregate amount of $550 million,
3. A U.S. revolving-credit facility in an aggregate amount of $450 million, and
4. An alternative currency revolving credit facility in an aggregate amount of $200
million.
GMCR used a portion of the proceeds from these senior credit facilities to repay GMCR’s
borrowings under its former credit facility and to pay the Van Houtte acquisition purchase price.
GMCR also planned to use a portion of the proceeds from these senior credit facilities to support
GMCR’s ongoing growth.
Subsequent to the closing of the transaction, GMCR anticipated conducting a strategic review of
Van Houtte’s U.S. coffee-services business, Filterfresh, in contemplation of a potential
divestiture of Filterfresh, given GMCR’s current sales and marketing structure and its existing
network of independent Keurig authorized distributors throughout the United States. The
proceeds from any divestiture would be used to reduce GMCR’s outstanding indebtedness.
Corporate Social Responsibility Shaped the Organizational
Culture at GMCR
Green Mountain was committed to conducting its business in a socially responsible manner. The
company believed that doing well financially could go hand in hand with giving back to the
community and protecting the environment. In their 2010 annual report, GMCR stated that their
success was supported by their long-standing commitment to social and environmental
responsibility (see Exhibit 11). That commitment, combined with GMCR’s entrepreneurial spirit
and highly engaged workforce, enhanced their competitive advantage and provided GMCR an
“opportunity to create better coffee, and brew a better world.” GMCR allocated 5 percent of their
pretax profits to support social and environmental projects every year. GMCR posted their
Corporate Social Responsibility Report at www.Brewing-ABetterWorld.com.
Exhibit 11: GMCR ’s Corporate Social Responsibility
Initiatives
GMCR worked to protect the environment. Waste reduction and responsible energy use were
two of GMCR’s top priorities and had been since 1983, when GMCR began composting in their
retail coffee shops. In 1989 GMCR developed Earth-Friendly coffee filters. More recent
examples of GMCR’s commitment to protecting the environment included working with
International Paper to bring to market the world’s first to-go cup made with renewable materials,
installing an on-site biodiesel fueling station, and embracing carbon offsets.
As the single-cup coffee market and Keurig brewing systems grew in popularity, GMCR
understood that the impact of the system was one of their most significant environmental
challenges. Finding a more environmentally friendly approach to the packaging challenge
represented by the K-Cup portion pack waste stream was a big priority for GMCR. GMCR
actively researched alternatives to the petroleum-based materials that made up the majority of
Keurig K-Cup packaging. GMCR commissioned Life-Cycle Analysis in 2008 to help
quantitatively understand the environmental impact of the K-Cup portion pack as it compared to
using a typical drip-brewer and identify the best opportunities to reduce its impact. GMCR
worked to identify the right definition of “environmentally friendly” for the Keurig system and
all their packaging. Because the term “environmentally friendly” can mean many things (carbonneutral, biodegradable, compostable, petroleum-free, etc.), GMCR was researching what was
possible today and tomorrow, taking into account the current state of packaging technology,
consumer preferences, community infrastructure, performance requirements, and the demands of
the marketplace. GMCR continued to offer the My K-Cup product, a reusable filter assembly
that could be refilled by the consumer, was easily cleaned, and was compatible with all Keurig
home brewers currently sold. On the brewer side, all Keurig engineers had been trained on the
European RoHS directive, which restricted the use of certain hazardous substances in electrical
and electronic equipment, and all Keurig brewers were RoHS compliant.
Keurig-Fueled Sales Growth at GMCR
For fiscal 2010, the Keurig single-cup brewing system (brewers and K-Cups) were driving
growth and value creation for GMCR. Approximately 88 percent of consolidated net sales for
GMCR were derived from the Keurig Brewing System (brewers, K-Cup portion packs, and
royalties). While net sales for GMCR’s specialty coffee business rose 64 percent in 2010 to $629
million, the Keurig business unit sales increased 81 percent to $728 million for total net sales of
$1,357 for GMCR. Sales were forecast to increase by 45–53 percent in 2011 to $1,968 to $2,076.
As a reseller, Keurig placed K-Cups and brewers side-by-side in outlets such as Bed Bath &
Beyond, Macy’s, Target, and many more. Keurig merchandised brewers and K-Cups in over
19,000 retail outlets plus 14,000 supermarket locations in fiscal 2010 (see Exhibit 12). For the 12
weeks ended December 26, 2010, the GMCR 12-count K-Cups had penetrated 61 percent of the
grocery stores in the United States.12
Exhibit 12: GMCR Sales Growth
Risks Brewing at Keurig
Manufacturer and Trade Risks
Because all Keurig single-cup brewers were made by a single manufacturer in China, GMCR
was exposed to significant risks that could materially adversely affect the supply or cost of
Keurig machines. Any disruption in production or inability of GMCR’s manufacturer to produce
adequate quantities to meet consumer demand, whether as a result of a natural disaster or other
causes, would significantly impair GMCR’s ability to operate their business on a day-to-day
basis. Furthermore, GMCR faces the possibility of product supply disruption and increased costs
in the event of a number of other occurrences, including changes in the policies of the Chinese
government, political unrest or unstable economic conditions in China, changes in foreign
exchange rates, or developments in the United States that are adverse to trade, such as the
enactment of protectionist legislation.
Quality and Liability Risks
Product recalls and product liability were also potential dangers. If GMCR’s manufacturer of
brewers does not adhere to product safety requirements or quality-control standards, GMCR
might not identify a deficiency before brewers ship to Keurig customers. This could damage
Keurig’s reputation, and thus GMCR’s reputation and brands, and even lead to customer
litigation against GMCR. Of course, GMCR maintains a reserve for product warranty costs,
which is based on estimates and their knowledge of current conditions, but GMCR’s actual costs
could exceed that reserve, resulting in higher costs and a need to increase their reserve for future
warranty costs. For example, during fiscal 2010, GMCR experienced higher than expected
warranty returns for certain brewer models. (They believed a component used in certain Keurig
brewer models during late 2009 to be at fault.) To correct the issue, GMCR replaced the affected
brewers and made changes to their hardware and software. However, it is possible that GMCR
will experience warranty expenses related to this or similar quality issues in the future.
Proprietary Technology Risks
GMCR’s ability to compete effectively depends, in part, on their ability to maintain the
proprietary nature of Keurig technologies, which include the ability to obtain, protect, and
enforce patents and other trade secrets and know-how relating to Keurig technology. GMCR
owns patents that cover significant aspects of their products, and certain patents of GMCR will
expire in the near future. In the United States, patents associated with GMCR’s currentgeneration K-Cup portion packs will expire in 2012 and 2017. GMCR also has pending patent
applications associated with current K-Cup portion pack technology which, if ultimately issued
as patents, would extend coverage over all or some portion of K-Cup portion packs and have
expiration dates extending to 2023. These applications may not issue, or if they issue, they may
not be enforceable, or may be challenged, invalidated, or circumvented by others. Additionally,
GMCR has a number of portion-pack patents that extend to 2021 but which GMCR has elected
not to commercialize yet and may never commercialize. In addition, Keurig has continued to
invest in further innovation in portion packs and brewing technology that would enhance their
current patents or could lead to new patents. GMCR takes steps to protect all such innovation
and is prepared to protect their patents vigorously. Given the complex technical issues and
inherent uncertainties in litigation, however, there can be no assurance that GMCR would prevail
in any intellectual property infringement litigation they instituted to protect their intellectual
property rights.
Risks of Integrating Acquisitions
Integrating GMCR’s acquisitions into their business presents significant challenges and risks to
their business, including: distraction of management from regular business concerns;
assimilation and retention of employees and customers; managing the operations and employees
of those businesses, none of which have been near their current headquarters and operation
locations; or GMCR might fail to successfully integrate the acquired businesses into their
business and, as a result, fail to realize the expected benefits of these acquisitions. Diedrich had a
history of operating losses, and GMCR’s ability to achieve and then maintain the profitability of
this business line depended on GMCR’s ability to manage and control operating expenses and to
generate and sustain increased levels of revenue. GMCR might fail to grow and build profits in
business lines or achieve sufficient cost savings through integrating customer service or
administrative and other operational activities. If GMCR was not able to successfully achieve
these objectives, the anticipated benefits of these acquisitions would not be realized, or it might
take longer to realize them than expected. As a result, their operations could be materially
adversely affected.
Risks from Fluctuating Commodity Costs
Significant fluctuations in the cost of other commodities, such as steel, petroleum, and copper,
influence prices of plastic and other components used in manufacturing Keurig coffee brewers.
Approximately 96 percent of the Keurig brewers shipped in fiscal 2010 were sold to the at-home
channel approximately at cost, or sometimes at a loss, when factoring in the incremental costs
related to sales (including fulfillment charges, returns reserve, and warranty expense). With
respect to the Keurig single-cup, at-home system, GMCR continued to pursue a model designed
to penetrate the marketplace, a component of which was to sell brewers at affordable consumer
price points in order to attract new customers into single-serve coffee. Any rapid, sharp increases
in their cost of manufacturing at-home brewers would be unlikely to lead GMCR to raise sales
prices to offset their increased cost, as GMCR’s strategy was to drive penetration and not risk
slowing down the rate of sales growth as compared to GMCR’s competitors or before realizing
cost reductions in GMCR’s purchase commitments. There was no assurance that GMCR would
be able to sell at-home brewers approximately at cost when such fluctuations occur.
Risks of Coffee Availability
Decreased availability of high-quality Arabica coffee beans could jeopardize GMCR’s ability to
maintain or expand their business. GMCR roasted over 50 types of green coffee beans to produce
more than 100 coffee selections. If one type of green coffee bean were to become unavailable or
prohibitively expensive, GMCR believed they could substitute another type of coffee of equal or
better quality meeting a similar taste profile. However, a worldwide supply shortage of the highquality Arabica coffees GMCR purchases could materially adversely affect their business.
Worldwide or regional shortages of high-quality Arabica coffees could be caused by multiple
factors, such as weather, pest damage, or economics in the producing countries. In addition, the
political situation in many of the Arabica-coffee-growing regions, including Africa, Indonesia,
and Central and South America, can be unstable, and such instability could affect GMCR’s
ability to purchase coffee from those regions. If Arabica coffee beans from a region became
unavailable or prohibitively expensive, GMCR could be forced to discontinue particular coffee
types and blends or substitute coffee beans from other regions in GMCR’s blends. Frequent
substitutions and changes in GMCR’s coffee product lines could lead to cost increases, customer
alienation, or fluctuations in gross margins. While the production of commercial-grade coffee
was generally increasing, many industry experts were concerned about the ability of specialty
coffee production to keep pace with demand. Arabica coffee beans of the quality GMCR
purchased were not readily available on the commodity markets. GMCR depended on their
relationships with coffee brokers, exporters, and growers for the supply of their primary raw
material, high-quality Arabica coffee beans. In particular, the supply of Fair Trade Certified
coffees was limited. GMCR might not be able to purchase enough Fair Trade Certified coffees to
satisfy the rapidly increasing demand for such coffees, which could materially adversely affect
revenue growth.
Endnotes
1.
Green Mountain Coffee Roasters Inc. (GMCR) & Starbucks Corp. 2011. Press release: Starbucks
Corporation and Green Mountain Coffee Roasters, Inc. enter into strategic manufacturing,
marketing, distribution and sales relationship. Business Wire, March 10.
investor.gmcr.com/releasedetail.cfm?ReleaseID=555937.
2.
GMCR & Dunkin’ Brands Inc. 2011. Press release: Green Mountain Coffee Roasters, Inc. and
Dunkin’ Donuts to make America’s favorite coffee available in K-Cup portion packs for Keurig
Single-Cup Brewers. Business Wire, February 22.
investor.gmcr.com/releasedetail.cfm?ReleaseID=551547.
3.
Javataza Specialty Coffee. Coffee is one of America’s favorite beverages.
www.javataza.com/index.php?option=com_content&view=category&layout=blog&id=4&Itemi
d=26&lang=en&limitstart=15
4.
Black, K. 2009. Business statistics: contemporary decision making. 6th ed. Wiley. p. 268.
5.
Starbucks 2010 Annual Report. Coffee facts and statistics. 2011. Specialty Coffee Association of
America. www.scaaevent.org/PDF/Press%20Kit/2011/Facts%20and%20Figures.pdf
6.
Marquardt, K. 2008. Brewing profits, a cup at a time: Green Mountain heats up the single-serve
coffee market. U.S. News & World Report, 145, no. 11 (November 17): 55.
7.
Duff, M. 2007. Latest brewers may serve up sales, good coffee. Retailing Today, April 23: vol.
46, iss. 6, page 18.
8.
GMCR. 2007 annual report.
9.
Keurig Coffee, 2008. Press release: Keurig celebrates 10th anniversary–providing gourmet single
cup coffee brewing to homes and offices. January 21. www.keurig.com.
10.
GMCR. 2008 annual report.
11.
Business Wire. Keurig and Caribou coffee announce single cup coffee partnership. 2007.
January 8. www.businesswire.com/news/home/20070108005606/en/Keurig-Caribou-CoffeeAnnounce-Single-Cup-Coffee
12.
GMCR, 2011. Press release: Fiscal Q1 2011 performance. February 2. www.gmcr.com
*
This case was prepared by doctoral student Keith F. Moody and Professor Alan B. Eisner of Pace
University as a basis for class discussion rather than to illustrate either effective or ineffective
handling of an administrative situation. Material has been drawn from published sources.
Copyright © 2011 Keith F. Moody and Alan B. Eisner.
Case Study Instructions
Case Study Report
Outline and Grading Guide (150 points)
COMPANY NAME/WEBSITE/INDUSTRY
State the company name, website address and industry
BACKGROUND/HISTORY
Briefly describe the company in the case study. What is their primary business, who were
the officers or key players described in the case study? If the case study company is
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Describe the performance of this company in the industry. Visit the company’s website and
use http://finance.yahoo.com and or some other financial search engine to find this data.
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Using the information in the case study, perform a SWOT analysis on this company.
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Analyze the competitive environment by listing the threat of new entrants, the bargaining
power of buyers, the bargaining power of suppliers, the threat of substitute products and
services, and the intensity of rivalry among competitors in the industry (Chapter 2).
Summarize your key points in a Figure. (25 points)
STRATEGY USED
How does this company create and sustain a competitive advantage? What strategy was
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How is the strategy affected by the life cycle in the industry? Remember to reference
Porter’s generic strategies identified in Chapter 5 of the textbook. (20 points)
THE ISSUES AND CHALLENGES FACING THIS COMPANY
Can the company’s competitive advantage be sustained? How will that be accomplished?
Where are they in the product life cycle? What is the company culture like? Do they need to
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COURSE OF ACTION RECOMMENDED
If you were in a position to advise this company, what strategy would you recommend to
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REFERENCES
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
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
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
Place your name in the upper left hand corner of the page.
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
Please prepare reference page as follows:
References
Dess, G., Lumpkin, G. & Eisner, A. (2012). Strategic Management (6e).
Boston: McGraw-Hill Irwin.

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