Which came first, the brewer or the coffee? Clearly, coffee came first for Green Mountain Coffee Roasters Inc. (GMCR), Waterbury, Vt., which has been roasting specialty coffees since 1981. But when the company added its Keurig division in 2006, which supplies Keurig Single-Cup Brewing Systems, the business plan became: If you sell the brewer, single-cup sales will come. And they have.

 

Even in this difficult economy, GMCR posted net sales of $197 million for its first fiscal quarter of 2009, representing a 56 percent increase over the first quarter of 2008. Systemwide, Keurig licensed roasters shipped 55 percent more K-Cup portion packs, which are cups filled with coffee, tea or hot cocoa and made especially for Keurig systems, in the first quarter over the same period last year.

 

With single-cup coffee sales growing, GMCR finds itself uniquely positioned by owning coffee brands, the Keurig brewing system and K-Cup technology under one umbrella. The company manages its operations through two wholly owned business segments: Green Mountain Coffee and Keurig Inc. Its Green Mountain Coffee segment sells more than 100 coffee selections, including Fair Trade and organic certified coffees under the Green Mountain Coffee and Newman’s Own Organics brands. Green Mountain Coffee also manufactures coffee, tea and hot cocoa K-Cup portion packs for the Keurig Single-Cup Brewers.

 

 

Green Mountain Coffee began as a small café in Vermont. Founder Bob Stiller soon saw that the demand for high-quality, freshly roasted coffee expanded beyond the café’s walls, and moved the Green Mountain Coffee brand into the wholesale business and then into mail order. The majority of the company’s sales are generated by its wholesale business, which serves more than 8,000 accounts.

 

Stiller developed a concept of surrounding consumers with opportunities to drink great coffee, and he aimed to change consumers’ perceptions of specialty coffee as only being available for purchase in specialty coffee shops.

 

“Part of Green Mountain Coffee’s success was offering its coffee broadly through multiple channels,” says Larry Blanford, president and chief executive officer. “The whole drive behind that was the notion that wherever you are, McDonald’s, a convenience store, buying groceries or home, you should have a great cup of coffee. Why should you suffer through a bad cup of coffee because you are in one location or another?”

 

Stiller, who served as GMCR’s president, chief executive officer and chairman from the company’s inception to May 2007, currently serves as its chairman of the board of directors. Blanford joined the company in May 2007.

 

GMCR’s recent growth has been driven by the Keurig system, but the company also is growing its Green Mountain Coffee lines. In fact, a nice synergy exists between Keurig Single-Cup Brewing Systems and Green Mountain Coffee’s products, Blanford says. Each brewer sent from GMCR includes 18 Green Mountain Coffee K-Cups. The K-Cups feature Green Mountain Coffee branding on the top of every cup, which has been particularly helpful in building brand awareness outside the company’s Northeast base.

 

“What a fantastic way of providing trial of Green Mountain Coffee!” Blanford says. “…It’s expensive to create a national brand. We are now building awareness for Green Mountain Coffee nationally.”

 

As GMCR expands to a national footprint, it creates an opportunity for the company to distribute its coffees to new groceries, restaurants, convenience stores and hotels.

 

“We have this one-two punch,” Blanford says. “Right now, the first punch is absolutely the brewer, but as we build awareness, it allows us to grow our traditional coffee business outside the Northeast and expand geographically across the country. It’s really a magnificent synergy.”

 

To fuel K-Cup demands, GMCR purchased a facility in 2008 in Knoxville, Tenn., to package single-cup portion packs. This year, the company went back to its coffee roasting roots, and is in the process of installing coffee processing and roasting equipment in the facility.

 

“First and foremost, we really do see ourselves as a coffee roaster,” says Scott McCreary, Green Mountain Coffee’s chief operating officer. “That is an area we have special expertise in that we care a lot about — roasting coffees to their perfect level. We’ve spent years and years fine-tuning that.”

 

In further support of its national expansion, GMCR is in the process of acquiring the Tully’s coffee brand and wholesale business from Tully’s Coffee Corp., Seattle. Tully’s distributes specialty coffees and related products, and has a strong base on the West Coast, which complements Green Mountain Coffee’s East Coast presence. Tully’s Coffee Corp. will remain an independent company with a focus on its retail and international assets. Tully’s retail business will operate under license and supply agreements with GMCR.

 

“Tully’s is an enabling move,” Blanford says. “It won’t contribute significantly this year, but it really sets us up for growth.”

 

In December, Green Mountain Coffee strengthened its business in the Northeast by extending its agreement with McDonald’s USA, which began in 2005, to source, roast and package Newman’s Own Organics Blend coffee for more than 600 McDonald’s restaurants in Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, Maine and Albany, N.Y. The Newman’s Own Organics Blend is created exclusively for McDonald’s, and is available in regular and decaffeinated varieties, and is served as both hot and iced coffee. At select McDonald’s locations, Green Mountain Coffee provides Newman’s Own Organics Blend in three iced coffee flavors: Hazelnut, Vanilla and Caramel.

 

Last year, Green Mountain Coffee also announced that Friendly’s restaurants selected it to be its primary supplier of specialty coffee. The chain is introducing Green Mountain Coffee’s Our Blend and Colombian Decaf to more than 300 restaurants across 11 states.

 

 

Green Mountain Coffee’s relationship with its customers has led to the development of more than 100 varieties of coffees, including seasonals, single origin, blends and flavors, and Fair Trade and organic certified coffees in numerous packaging options. For example, Green Mountain Coffee developed Revv with a dark roast “energy coffee” profile. Originally launched with Exxon Mobil Corp., Revv is now being sold in convenience stores nationwide.

 

Many of Green Mountain’s coffees tend to focus on light and medium roasts, which allow the flavor of the coffee’s origin to come through more clearly than a dark roast coffee, McCreary says. Light and medium roasts allow Green Mountain Coffee to create more varieties because they showcase more of the inherent qualities in the coffees.

 

While single-origin coffees may target one end of the coffee consumer spectrum, Green Mountain Coffee also offers flavored coffees, such as Golden French Toast, Pumpkin Spice and Island Coconut. Flavored coffees make up about 30 percent of the company’s coffee sales.

 

Fair Trade and organic coffees also represent about a third of sales. First quarter 2009 sales of Fair Trade and organic coffee are up 3 percent from the first quarter of last year. Newman’s Own Organics also continues to be one of the top-selling Fair Trade certified organic brands in the country. Even though Green Mountain has been selling Fair Trade and organic certified coffees since the early ’90s, the company is still in the education phase of Fair Trade and organic’s value with its consumers, it says.

 

“For us, we’re delivering really high quality and helping people to understand that Fair Trade does, in fact, get more money to the farmers and to the community to help them create a sustainable life through health care and education,” McCreary says.

 

“Organic we like just because it keeps the pesticides and herbicides out of the environment, but it’s also more healthy to those workers who are working there. At the same time, organic growers don’t get the same yield as those that are using other chemicals, so we recognize that they need more money for their coffee in order for them to make it a sustainable path. We are committed to it. We are committed to continue to support its growth.”

 

Offering Fair Trade and organic certified coffees is only a part of Green Mountain Coffee’s sustainability initiatives. The company works with coffee-growing communities globally to improve their quality of life, in ways such as helping to alleviate poverty and hunger for a more sustainable future. The company’s purpose remains: “We create the ultimate coffee experience in every life we touch from tree to cup — transforming the way the world understands business.”

 

Eco-friendly packaging also is an important piece of Green Mountain Coffee’s sustainability efforts. In 2008, the company restaged its 10- and 12-ounce bags of Signature, flavored, Fair Trade certified, organic certified and seasonal coffees with a new redesigned look featuring vibrant line-specific colors and clearer branding. The updated packaging contains 19.4 percent PLA — a bioplastic made from renewable resources. GMCR also is conducting Life Cycle Analyses to help it understand the overall environmental impact of its K-Cup portion packs and its other packages. In addition, a team is working to develop alternative materials for K-Cups.

 

Along with the company’s Fair Trade and organic certified coffees’ success, its signature coffee blends still prove to be an important option to consumers. Green Mountain Coffee’s Our Blend, Nantucket Blend and Vermont Country Blend have been the long-standing leaders in its lineup, and are available in multiple channels.

 

“Even with all the new offerings that we put out, those tend to be our key favorites that people have stuck with,” McCreary says. “There are people who have their favorites and drink that every day, and there are others that want to try something new and different every day. We’re in a position to take care of everybody.”

 

A little more than half of Green Mountain Coffee’s volume this year will be in K-Cups. The other two main categories are 10- and 12-ounce bags for grocery and fractional packs for foodservice. In 2009, Green Mountain Coffee expects to sell about 38 million pounds of coffee.

 

 

Last year, GMCR went from being a small player in the single-serve coffee segment to being a large player to being a leader, Blanford says. The Keurig Single-Cup Brewing Systems were introduced in 1998, but it wasn’t until the past few years that single-serve coffee brewing moved from niche to mainstream.

 

“We were the bright spot at Christmas,” says Michelle Stacy, chief executive officer of Keurig. “We were up 121 percent year-over-year in brewer sales during this Christmas season. We were the only significant coffee-maker brand to grow sales during the quarter, and we ended up the Christmas season in total coffee makers, according to NPD Group data, as the No. 2 coffee [maker] brand sold at Christmas … Every one of our retailers is extremely pleased with us right now and only wants more machines and more coffee.”

 

It would not have happened if the Keurig systems didn’t represent a fundamental value proposition that made sense to the consumer whether they were thinking about the office or home, Blanford says. A cup of specialty coffee from the Keurig system runs between $0.50 and $0.60.

 

Consumers also value Keurig’s brewing quality, Stacy says.

 

“What comes out of that machine is meeting and exceeding consumers’ expectations,” she says.

 

“I think the second thing that’s really fueling the growth is opportunity for choice. Consumer trends are driving toward being able to choose, being able to customize.”

 

Research also has shown specialty coffee drinkers have a high tendency toward switching coffees frequently, Stacy says. In addition to the Green Mountain Coffee brand, Keurig partners with 13 roasters, including Bellaccino Coffee, Caribou Coffee, Coffee People, Diedrich, Emeril’s, Gloria Jean’s, Newman’s Own Organics, Timothy’s, Tully’s and Van Houtte to supply K-Cup coffees. Tea partners include Bigelow, Celestial Seasonings and Twinings Tea, and hot cocoa brands include Bellaccino, Ghirardelli and Timothy’s.

 

“It’s almost impossible for consumers to manage multiple varieties of coffee at home and keep them fresh,” Blanford says. “If you’ve got more than one coffee drinker, then the issues just start to multiply … We have over 200 varieties of coffee, tea and hot cocoa available that you can enjoy.” Coupled with more quality, variety and value, Keurig systems are also easy to use and clean, Stacy says.

 

“I pick up a cup that has no mess, no drip and no grounds,” Stacy says. “I’m not cleaning out coffee pots. I’m not cleaning out drip filters. I’m not throwing away unwanted coffee.”

 

Each K-Cup may look simple, but K-Cups are made with a seven-layer composite structure, which is designed to protect the coffee from oxygen and moisture, known to cause coffee to stale. “Each of the portion packs is protecting the coffee, and with each brew you get a very fresh cup of coffee,” Blanford says.

 

While GMCR supports consumer purchases of the Keurig Single-Cup Brewing Systems, the company says it is not making money on the Keurig brewers.

 

“We’re kind of breaking even on Keurig brewers, particularly in the at-home market, so that we can keep them affordable,” Blanford explains. “Where we do make our money is in K-Cup portion packs.”

 

For retail, Keurig recently realigned its pricing to leave room for new innovation. In its line of traditional brewers, its Elite retails for $99, the Special Edition for $129 and the Platinum for $169. Keurig also offers a Breville Keurig brewer that retails for around $300. Each of these brewers has a water reservoir, and they brew a cup of coffee in less than a minute.

 

For consumers with a lower price point, Keurig released the Mini, which retails for $79.99. The Mini is intended for individual use, does not offer a water reservoir and takes three minutes to brew a cup of coffee.

 

“The Mini was introduced with really two intentions in mind,” Stacy says. “The first was really to bring our existing Keurig consumers an opportunity to have a second brewer that they could put in a second location…” Stacy says. “The other reason that the Mini was introduced was to begin to make the Keurig brewer more accessible to more consumers.”

 

Keurig’s target consumers are engaged with specialty coffees, and they have the ability to afford both the brewer and the higher price of the K-Cup.

 

“There are 90 million coffee-drinking households, and we estimate that 40 million are what we would call our target audience,” Stacy says. “And these consumers are consumers who do like a premium cup of coffee.”

 

Keurig also targets offices, especially those with less than 20 employees, such as law, real estate and financial services offices and automobile dealerships. For the office, Blanford says the Keurig Single-Cup Brewing System, with its 30-second brewing time, solves the problems of wondering: How long do you have to wait for the coffee to brew? Was the coffee made properly? How long has a pot of coffee been sitting there? Are there more options than decaf and regular?

 

Green Mountain Coffee is not worried that single-cup sales will cut into its bag sales because the single-cup category is still in early stages of growth. One trend the company is seeing that is not totally independent of the popularity of Keurig Single-Cup Brewing Systems is national sales of whole bean bulk coffee in grocery stores are down. In these groceries that have historically provided bulk coffee and have seen consumers decrease their purchases, Green Mountain Coffee is working to reduce the number of bins of bulk coffee to free up space for Keurig brewers and K-Cup portion packs.

 

“In that regard, maybe we can argue that we’re replacing bulk with single cup, but in general, we’re still early on in this thing,” Blanford says. “We’re growing our business because we’re increasing awareness. We’re a relatively small share inside the coffee market — outside of single cup anyway — so there is a lot of room for us to grow on both sides.”

 

In November, Keurig released a new single-cup brewer, the Classic, exclusively for grocery locations. Green Mountain Coffee also debuted a compact 12-count box of K-Cups, available in 10 varieties of coffee. The 12-count package is specifically designed to fit on supermarket shelves.

 

To support growth, GMCR invested more than $15 million in marketing during the holiday season, including Keurig’s first national TV advertising campaign. Other marketing initiatives include co-op advertising, promotion and merchandising support, in-store demos and direct mail programs.

 

 

Coffee may not be recession-proof, but it is at least resistant, Blanford says. This year, GMCR expects most of its growth to come from Keurig brewers and the K-Cup portion packs.

 

“As one of life’s small luxuries, people are still buying coffee,” Blanford says. “Now, relative to the single-serve market, I think we’re kind of at a nice intersection of value and quality, so that people who were otherwise purchasing coffee outside the home and outside the office now get the Keurig Single-Cup System at home or in the office at a total cost that is certainly more economical.”

 

Blanford also feels that since the company is still in the early stages of its lifecycle, it is better positioned than other companies in this economy.

 

“Maybe in an up economy our growth would have been another 10 points higher, but we’re growing so fast,” he says. “…We’re projecting that [K-Cups] are going to stay in the 50 to 60 percent growth range, and it’s enormous growth for us.”

 

While the company feels blessed about its success, rapid growth doesn’t come without stress. Green Mountain has been working to upgrade systems, enhance facilities and hire and train more people to support the growth.

 

“I am most proud of our organization’s ability to step up and support the tremendous growth that we’re experiencing,” Blanford says.