Keurig Green Mountain (NASDAQ:GMCR) seems to be drawing attention to its new Keurig 2.0 brewing platform for all of the wrong reasons. When the new coffee brewer rolled out this summer it came under critical attack from early adopters upset at its restrictive ways. However, now the stakes are getting higher as third-party coffee distributors are suing because they're getting shut out of the K-Cup food chain.
Keurig 2.0 is the first Keurig brewer that isn't exclusively a provider of single-serve blasts of Joe. It accepts the new K-Carafe portion packs that brew whole pots of coffee. However, the controversial feature of the new machine is that it uses scanning technology to read the K-Cup label to determine the best brewing path to take. This has been problematic for some owners because if it's not a licensed K-Cup with the "Keurig Brewed" logo on the lid the brewing process won't begin. Yes, even older licensed K-Cup portion packs get shot down.
It's easy to see why Keurig Green Mountain is taking this route. When its original K-Cup patents ran out two years ago it was exposed to the competitive threat of private labels putting out cheaper K-Cup portion packs. Most of Keurig's partners -- including premium juggernaut Starbucks -- stuck with the company. There are advantages to having Keurig muscle, branding, and distribution on your side. However, another big reason for Keurig partners to stick around is that Keurig Vue and now Keurig 2.0 have fresh patents to keep the competition out. If you want to make your bean water available across all Keurig brewers you're going to have to go the licensed K-Cup route.
This naturally isn't sitting well with other coffee distributors, and they're starting to get litigious about it. Last month it was Rogers Family Co. filing an injunction against Keurig for the scanning technology that keeps its third-party K-Cups out of the new Keurig 2.0 brewer. A federal judge refused to block the sale of the Keurig 2.0 machine as a result of the injunction. This week it's Canada's Club Coffee making a similar argument. It's suing Keurig to the tune of $600 million in damages, arguing that Keurig is trying to turn single-serve into a near monopoly that will keep prices high and competition out.
These are all moves that seem as bold as a shot of strong coffee, leading one to wonder if Keurig Green Mountain may have gone too far this time. If any of these now blocked K-Cup distributors come up big in the courtroom it could cost Keurig money, time, and the opportunity. Then again, it may not even have to get that far.
Consumers are the ultimate judge
Legal judgments may be moot if consumers don't warm up to the Keurig 2.0 platform in the first place. That seems to be what's happening at the moment.
The flagship K550 Keurig 2.0 brewer has an average of just 2.3 out of five stars on Amazon. More than half of the 122 reviews rate the system at the lowest single-star rating. The complaints, as expected, stem largely from the scanning technology that's popping out "Oops" error messages when a pod isn't a "Keurig Brewed" pod.
Whether it's a coffee drinker with older licensed K-Cups lying around or the java junkies with the refillable pods that they used to fill up on their own, a lot of people seem to be sticking to the earlier Keurig model. The Keurig Vue didn't offer the same variety of easily accessible flavors and now Keurig 2.0 comes with a loop that many don't feel like jumping through in pursuit of a caffeinated beverage. Even if Keurig prevails in the legal proceedings -- and it might -- the real challenge will be winning over the court of public opinion that doesn't seem to be going Keurig 2.0's way at the moment.
Rick Munarriz owns shares of Keurig Green Mountain. The Motley Fool recommends Keurig Green Mountain and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.