Single-serve coffee brewing systems are so hot right now. The sector is growing many times faster than the coffee business as a whole. And Keurig, the pod-brewing system made by Green Mountain Coffee Roasters, is the undisputed leader of the pack in North America; it commands a reported 40% of the market in Canada.
That runaway growth has been very good for Green Mountain, but it has also lured in new competitors, from the Tassimo system made by Kraft Foods to the Nestlé Nespresso system to Starbucks’ own Verismo. A big part of the business appeal in the segment was that—like computer printers, razors, or video games—you could sell the hardware cheaply and make the real profit on selling compatible refills.
One of the things that accelerated the pod-coffee craze was the 2012 expiry of Green Mountain’s patent on the “K-Cup” design. That freed up other companies to start making generic pods that would still work in Keurig-brand coffee brewers—and those clones typically sold for 15-25% less than the brand-name pods sold by Keurig directly.
That’s all about to change. In its fourth-quarter earnings call last November, Green Mountain CEO Brian Kelley said this, of the forthcoming “Keurig 2.0” system:
We will be transitioning our lineup of Keurig brewers over fiscal 2014 and early 2015. While we’re still not willing to discuss specifics about the platform for competitive reasons, we are confident it delivers game-changing performance. To ensure the system delivers on the promise of excellent quality beverages produced simply and consistently every brew every time, we use interactive technology to help us perfectly brew all Keurig brew packs. Because of this the system will not brew unlicensed packs.
In other words, the new Keurig brewers will include software or hardware measures—something like digital rights management—to prevent you from brewing generic pods in it.
Cue the lawyers: yesterday TreeHouse Foods Inc., which previously manufactured a generic K-Cup clone, filed a lawsuit against Green Mountain Coffee Roasters, alleging that Green Mountain’s behaviour is anticompetitive. Here’s the important allegation from TreeHouse’s filing:
Green Mountain has monopolized the market for the sale of single-serve brewers, as well as the market for the sale of single servings or “portion packs” of coffees or other beverages that are used in those brewers. Green Mountain previously owned certain patents that allowed it to exclude competition for the sale of the most popular format of those “portion packs” — the “K-Cup” format — but those patents expired in 2012. However, rather than compete for market share on the merits or fulfill its statutory obligation to enable competitors to practice its invention after its patents expired, Green Mountain has abused its dominance in the brewer market by coercing business partners at every level of the K-Cup distribution system to enter into anticompetitive agreements intended to unlawfully maintain Green Mountain’s monopoly over the markets in which K-Cups are sold. Even in the face of these exclusionary agreements that have unreasonably restrained competition, some companies, such as TreeHouse, have fought hard to win market share away from Green Mountain on the merits by offering innovative, quality products at substantially lower prices. In response, Green Mountain has announced a new anticompetitive plan to maintain its monopoly by redesigning its brewers to lock out competitors’ products. Such lock-out technology cannot be justified based on any purported consumer benefit, and Green Mountain itself has admitted that the lock-out technology is not essential for the new brewers’ function. Like its exclusionary agreements, this lock-out technology is intended to serve anticompetitive and unlawful ends.
For its part, Green Mountain told U.S. food industry trade publication FoodNavigator that “The suit is totally without merit and we intend to defend it vigorously.”
Either way, Green Mountain’s investors don’t seem worried.