The New Home Coffeemakers: Keurig Machines & K-Cups

I am sure that you've all seen the (relatively) new "K-Cup," which works with a special Keurig coffee machine that is built to handle them. The K-Cup is a small, 2 oz., light plastic cup (shaped like a Dixie Cup), that holds a dose of ground coffee, tea, or cocoa powder. It has a foil top, so it is sealed. The K-Cup is a self-contained disposable unit that is used to make coffee, tea, or cocoa with the Keurig machine.

This Keurig machine, together with the K-Cup, creates a completely new business model in the coffee industry. The entire business concept was started by Green Mountain Coffee, in Waterbury, Vermont. Green Mountain Coffee was started by Robert Stiller in 1981, who was its CEO until very recently (2007). Stiller had a history of being very creative at high-margin ideas. In the 1970s, Stiller made his first fortune by starting the Joker Rolling Paper company, which was the major supplier of "cigarette" rolling papers (called "Easy Wider") to Head Shops in it's day.

While cigarette rolling papers are certainly a high-margin business, Stiller has hit a much bigger market in the coffee business, and the new K-Cup is a brilliant concept - also with very high margins. Under Stiller, Green Mountain Coffee purchased Keurig. Together, they made a competely new type of machine that changes how coffee is marketed for home use (so far). This concept is analagous to cell-phones: the phone itself is NOT the business; it's the monthly service.

In this case, the concept was to sell the Keurig machine at cost (which is why businesses like ours don't sell them - there's no margin), and to make the real business the disposable capsules - of which the Keurig machine owners would be likely to buy many on a continuing monthly basis. While the margins (meaning "profit") in the Keurig machines are (roughly) ZERO, the margins in the K-Cups are HUGE; probably better than cigarrette rolling paper.

If you Google "K-Cups," you'll see that they sell for about 50-cents each (e.g., $12.99 for a box of 24 K-Cups). A K-Cup contains about 9 grams of ground coffee. Since there are 453 grams in a pound, a pound of coffee will make about 50 K-Cups. At 50-cents each, this allows Green Mountain to sell generic coffee for about $25 per pound. This is about 5X more than you would pay for the same coffee in a bag or a can - which already has a substantial margin. A great margin indeed! Better than rolling papers.

Right now, Green Mountain Coffee holds about 80% Market Share in the K-Cup business, which is estimated at about 60 Billion K-Cups per year. At 50-cents per K-Cup, an 80% Market Share amounts to about $24-Billion in coffee sales per year. That's quite a business.

But how is the coffee iteself? It's certainly comparable to the drip coffee most people make at home. It's the same coffee, although the brew cycle is slightly different in the Keurig machines. Note that since the entire Green Mountain / Keurig concept was "convenience" and "ease-of-use" (kind of like the microwave oven), the brew cycle is about a minute. Were it 5 minutes (like a typical drip-coffee brewer), it wouldn't be suited to the "single-cup, convenience" home market.

Again, like the microwave oven, the main feature IS convenience (which includes speed). For this, we DO pay a premium, and are willing to do so. But to be quite frank (as we would with the microwave oven) the coffee is merely "good," it isn't "great" (yet). Also, we've found that for the coffee to be at all full-bodied, the extraction in the Keurig machine should be set to 4 ounces. Since most people think of a cup of coffee as being 6-8 ounces, this likely means that you will use more K-Cups if this is your home-brewing choice.

Because of the very high margins - which are there to provide convenience for home or office use, it is unlikely that Green Mountain Coffee & Keurig will penetrate the commercial market just yet. To do this will require some quality improvements, and a very different business model with much lower margins.

We like what Green Mountain Coffee & Keurig have done. But please understand: what they've done is to create a completely new model (and market) in home-brewed coffee.