Keurig Green Mountain (NASDAQ:GMCR) so thoroughly dominates the single-serve brewer market in the United States that the nearest competitors to its K-Cup machines barely exist in the category.
Starbucks (NASDAQ:SBUX) does not release sales figures for its single-serve brewer, the Verismo, but continued price cuts and diminishing floor space being given to the single-cup coffee/espresso maker suggest it's not succeeding (which I wrote about here). Similarly, Nestle's (NASDAQOTH:NSRGF) Nespresso machines are successful globally but have yet to make much of a dent in the U.S. The brand has only a 3% share of the U.S. single-serve market compared to Keurig's 72%, according to Euromonitor data reported on by Bloomberg in February.
With its competitors serving as, at best, Jack in the Box to its McDonald's, Keurig's only real challenge is keeping its customers engaged and growing its business to the community it already serves. One method of doing that is launching a new brewer that brews single cups (using the familiar K-Cup) and full-size carafes (using a new pod). The company has done this with its Keurig 2.0, a product CEO Brian Kelley sees as a game changer, saying this when the product launched a couple of months ago:
Our new Keurig 2.0 system is the next innovative step for our hot beverage brewing system. Eleven years ago, we revolutionized the way consumers brewed coffee in the home with a single cup system, and we've used the knowledge and expertise we've gained along the way to form the basis for continued innovation. We're thrilled to have changed the game yet again by offering consumers the ability to brew a variety of sizes, from a single cup to a carafe, and choose from more than 290 varieties from more than 50 brands, all within one system, Keurig 2.0.
That's a heavy level of hype for a system that basically adds a little functionality to the K-Cup brewer people already own while tacking on the ability to make full pots -- something we bought Keurig machines to not have to do in the first place.
Vue has been a failure
Keurig tried to launch a new brewer before, the Vue. It used its own proprietary pods, Vue Packs, but otherwise it was marketed around a lot of the same features pushed as reasons to buy the 2.0. At the time of its launch more than two years ago the company described it in a press release as "a premium new platform designed with the ability to brew stronger, bigger, and hotter. The new Vue brewer, paired with new Vue packs, maintains the simplicity and convenience of the existing Keurig K-Cup system with added customizable features so consumers have control over the strength, size, and temperature of their beverages."
The company does not break out Vue sales specifically in its financial reporting but it's clear the Vue has been a failure. The machine, which was introduced in 2012 as Keurig's original K-Cup patent expired, was supposed to launch a new format which extended the company's patent-protected dominance through 2021. A simple visit to your local grocery store shows that did not work as shelves are stocked with K-Cups (including many unlicensed ones which are legal since the patent expired) and nary a Vue pack.
There is no reason to upgrade
The biggest challenge facing Keurig is that its original K-Cup brewers are durable. If you have a working machine, spending $129.99 (full retail of $149.99 with a $20 discount on Keurig.com) just because it has some new features makes little sense. It's the same problem Sony and Microsoft face when marketing their new gaming consoles. The difference is that eventually a game is likely to come along specifically for Xbox One and PS4 that will entice customers to upgrade. It's unlikely that any particular 2.0 beverage exclusive would be enough of a draw to make customers fork out the cash required to upgrade.
Customers will be annoyed when they buy an unlicensed K-Cup and it does not work
Early adopters of the 2.0 are not building a buzz. Overall feedback for the K550 2.0 Brewer, which Amazon ranks as a best-seller in espresso machine & coffeemaker combos, seems largely negative. The product had an overall two-star rating recently but comments like this one from an anonymous Amazon customer are typical:
They took a potentially killer machine and added horrible DRM -- a rights management system, in the greedy attempt to get all other coffee pod manufacturers to pay them so their pods work. If they don't pay, that's right, their pods don't work. Don't buy this and protest to the company or buy another manufacturers system.
Though some companies are finding ways around the digital rights management technology (and it's relatively easy to hack on your own) the company is likely to be buried in new bad reviews each time a 2.0 user goes to use an off-brand, unlicensed K-Cup. The DRM tech may make sense from a business point of view -- Keurig wants to make companies pay it a royalty -- but it's a public relations disaster sure to upset customers.
Keurig may be OK in the long run
Ultimately, unless a competitor comes along with a single-serve brewer enticing enough to peel off Keurig customers, the 2.0 should eventually succeed. As the original K-Cup brewers eventually wear out, people will likely turn to the 2.0 That's a long horizon, but if the company has patience, it's a day that will eventually come.
Daniel Kline owns shares of Microsoft. The Motley Fool recommends Keurig Green Mountain, McDonald's, and Starbucks. The Motley Fool owns shares of Microsoft and 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.