Keurig has a big problem. The maker of single-serve coffee machines and K-Cup pods isn't just seeing consumer demand for its brewers decline, it's seeing it fall at an accelerating rate. It's a sign that interest in high-tech brewers compatible only with specially packaged, high-cost coffee pods has its limits.
Keurig's brewer sales have fallen for three consecutive quarters following the failed rollout of its highly-anticipated Keurig 2.0 brewer last August. The number of brewers sold fell 22% in the first three months of 2015 (Keurig's fiscal Q2 in the chart below), compared to a year earlier.
Keurig, initially confident the new machine would boost 2015 sales, recently told investors its sales may plateau this year based on recent trends.
Unlike its previous machines, Keurig 2.0 offered the flexibility of brewing one to four cups of coffee at a time. Yet the launch was troubled from the start. At $140 to $200, it was a costly coffee maker--the less expensive version wouldn't launch till after the critical holiday retail season. But the far bigger problem is the machine is only compatible with a limited range of company-approved coffee pods.
Keurig made roughly three-quarters of its $4.7 billion in sales last fiscal year from K-Cups, both its own brands like Green Mountain and a large portfolio of partner brands like Starbucks and Folgers.
While these so-called "licensed" brands make up the bulk of K-Cup sales, competitors were starting to make their own after the expiry of a number of patents opened up the system to outsiders. Supermarkets, for example, were making their own labeled pods.
To protect its business and squeeze out rogue pod makers, Keurig designed the new 2.0 brewer to work only with a new system of K-Cups that it could control the production of. It would phase out the old pods, as well as get rid of the refillable pods that some customers had begun using. Customers weren't happy.
"They underestimated the consumer pushback to 2.0 and have so far failed to adequately adjust," says UBS analyst Steve Powers. "There is legitimate concern around where they are heading."
The changeover created a lot of confusion and unhappy customers. Existing Keurig users who upgraded suddenly found their supply of old K-Cups unusable in the new machines. And since retailers were still selling the old K-Cups, many accidentally bought the wrong ones for 2.0.
Other consumers complained that the 2.0 didn't support their favorite brands. That's because while the major new feature of the 2.0 was that it could brew either a cup or a carafe of coffee, only a few varieties were available in the carafe size.
Agitated buyers complained in product reviews, discouraging those with conventional drip coffee makers from making the switch to Keurig.
What's even more troubling for Keurig are the budding signs of consumer frustration at the tightly controlled system of machines and K-Cups on which the company depends.
While Keurig is highly protective of its K-Cup business, it has essentially conceded that it may have to loosen its grip. In response to complaints about the discontinuation of "My K-Cup" filters, which allows users to scoop regular ground coffee into the brewer instead of using the pre-packaged pods, Keurig is reintroducing the accessory for the 2.0.
The problem for Keurig is My K-Cup frees users from from its lucrative pod system, even as it gives consumers the perception of limitless choice. "The ethos that sends is that we want consumers to be able to brew every brand, any brand of coffee in their machine," said CEO Brian Kelley during the most recent earnings call.
Keurig remains hopeful that the recent setbacks are temporary. Roughly 20 million U.S. households now use a Keurig machine and Kelley reinforced the company's belief that it can grow that number to at least 50 million households.
"The 2.0 technology is a first step in what we expect will be an innovation that allows us to build more features and functionality into the platform, but allows us to maintain the simplicity they expect from Keurig," spokeswoman Suzanne DuLong told BuzzFeed News. The company is also hoping that the upcoming "Kold" machine that makes branded cold beverages like Coca-Cola will take off when it launches this fall.
Yet CLSA analyst Caroline Levy is skeptical that this is a short-term problem. "They've sold fewer brewers than they expected and this obviously impacts demand [for K-Cups] in forward years," she said. They've upset a number of their customers and they have to win them back." She expects a "major slowdown" in demand for K-Cups for at least the next 12 months. "The jury is out on what happens after that."
UBS's Powers says there is still a lot of goodwill behind the Keurig brand. "It's within Keurig's conctrol whether this [decline] is temporary or permanent." If the company can't correct these problems, "we may see a plateuing for a while."