TreeHouse Foods Feels Burned by Green Mountain Coffee Roasters

Often, companies who've given up on succeeding in the marketplace seek the sanctuary of the courtroom, hoping to achieve by legal edict what they couldn't accomplish by competing. So it seems a little specious for TreeHouse Foods (NYSE: THS  ) to be taking Green Mountain Coffee Roasters (NASDAQ: GMCR  ) to court for trying to monopolize the single-brew market and improve its products with a new Keurig coffee brewer.

TreeHouse is suing the coffee maker because it claims that in the wake of its patent expiration, Green Mountain is pursuing exclusive deals with suppliers and distributors that will crowd out competition and amount to an exertion of monopoly power in the cup market. Worse, from the food company's perspective, is the rollout of Green Mountain's new Keurig 2.0 brewer that features "lock-out technology" preventing older style K-cups made by unlicensed manufacturers from working with the new units.

TreeHouse Foods was one of those companies like Safeway and Kroger that early on waited for Keurig's patents to die off before swooping in and offering generic coffee pods to consumers. Don't get me wrong, the discounted K-cups were a great deal for consumers who were previously paying a premium for Green Mountain's overpriced pods. In true razor-and-blade fashion, the coffee maker sold at cost its coffee machine but made a ton of profit on the consumable K-Cups. 

What TreeHouse is trying to say, however, is that Green Mountain must forever be wedded to that single technology, that it must never develop a new patentable improvement to its system so that TreeHouse can continue to profit off it. 

The old rallying cry "Innovate or die!" applies just as much to the coffee brewer world, and Green Mountain's investors paid the price when its patents expired because it had nothing else to offer. Its stock went from $108 a share to less than $18 each. Although TreeHouse must have enjoyed this, there's nothing wrong with Green Mountain trying to win back its preeminence with a new, exclusive machine. For one thing, there's no guarantee it will be successful, which is why Green Mountain is differentiating the new machine with the option of brewing up K-Carafes, a whole pot of coffee and not just a single cup of joe.

There's also the matter of pricing, because the Keurig 2.0 is a premium system and TreeHouse contends that consumers will have to pay 15% to 25% more for a K-Cup with the new model. What it neglects to say is that consumers who've grown accustomed to buying lower-priced pods won't necessarily be in a hurry to suddenly pay up, though it argues that this will block consumers from their favorite brands.

But there's not even any certainty people will go out and upgrade their machines. Green Mountain is gambling they'll want to do so, but as TreeHouse also notes, it's already got 89% of the single-serve market locked up. Although Nestle, Mondelez International, and even Starbucks have their own machines on the market, consumers have largely preferred the original Keurig, and while some people will want to have the latest technology, others will simply keep their old reliable unit.

As the recent deal with Coca-Cola shows, Green Mountain understands it needs to be more than a one-system company if it ever wants to ascend the heights again. The introduction of a DIY cold beverage system to take on Sodastream International -- who, by the way, isn't complaining about the invasion of its turf by a bigger, better-financed rival -- indicates the coffee maker isn't about to get locked into a single business model again.

Essentially, TreeHouse wants Green Mountain to build a new stadium but have the court force open the doors to allow it on the playing field. Last quarter it posted strong volume gains of more than 6% due to its fast-growing single-serve coffee business and obviously sees that threatened by the new Keurig brewer. But investors shouldn't accept it using the courts to keep its business growing.

What used to make America great was the process of building a better mousetrap, which Green Mountain Coffee Roasters is trying to do. TreeHouse Foods seems like it's just whining that a rival took its lunch money. And bringing it to the courts is just a waste of shareholder resources.

A big brew-haha
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  • Report this Comment On February 13, 2014, at 11:22 AM, reader995 wrote:

    Very nicely put, Rich Duprey.

    Remember in October 2010, GMCR sued Sturm Foods, now a subsidiary of Treehouse, to cease production of their K-Cups knockoffs, as that patent did not expire until 2012. They were unsuccessful for whatever reason. So Sturm infringed on the GMCR patent before it expired. And now feels it is entitled to profit from further GMCR's Keurig innovation.

  • Report this Comment On February 13, 2014, at 1:25 PM, sas912 wrote:

    This is actually hilarious given that Treehouse owns Sturm Foods which violated GMCR's k-cup patents BEFORE the patent expired and produced cheap "private label" k-cups under the name Grove Square. So now that GMCR has found a way to protect it's intellectual property by modifying the brewer to "lock out" the imposters, Treehouse cries foul?

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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