Issue link: https://read.dmtmag.com/i/491368
40 STiR tea & coffee industry international Keurig 2.0 makes a carafe, a tall mug or a single cup using three new capsules. Lasaters sells most capsules in-store. Premium private label TreeHouse Foods, a $3.5 billion food manufacturer based in Oakbrook, Ill., helped blaze the trail for private label manufacturers of Keurig-compatible cups. It now sup- plies more than 60 grocery and private label clients with non-licensed capsules. Rogers Family Co. in Lincoln, Calif. and Mother Parkers Tea & Coffee near Toronto were similarly defiant and are now reaping the rewards from firms previously frozen out of the market due to patents, high minimums and royalties that added 6.2 cents per unit. "Dollar and unit sales of private labels increased by 90% last year and we main- tained our lead at approximately two-thirds of that total," boasts Sam Reed, TreeHouse Foods executive chairman, c.e.o. and president. Much of this growth is in addition to the handful of flavors that make up the core coffee and hot beverage offerings, he said. TreeHouse introduced several new flavor combinations and has grown sales by training clients in category management, mer- chandising, price-point management and consumer communication. "We found that the prospects remain quite robust," said Reed. Private label manufacturers are no longer focused on big brand knockoffs, he ex- plains. "If you've got a very strong private-label program that generates extra profits, you can use that to fund some other categories, where you want to be price competi- tive. That tactic is working well for many of our customers," said Reed. Fast moving consumer goods Mike Ferguson sells 400 varieties of single-serve capsules and is adding more week- ly. Customers visiting his CoffeeIcon "superstore" outside Houston, Tex., pick and choose from a huge selection of Keurig compatible capsules as well as dozens of big- brand licensed roasters. At ECS Coffee, another capsule superstore near Toronto "we are 60% in regional and smaller roasters, 40% in Keurig Green Mountain right now. They are still strong in multinational brands," writes Neil Madden, c.e.o. He notes "a massive shift in volume to grocery. Convenience is playing a major role." Ferguson agrees that grocery stores "are our worst competition – even though they are priced 10-20% higher. It's the convenience – not the price or selection. A grocery store may have 20-50 brands, we have 400+ and growing including our own private label single serve cups," he said. In grocery we're finding a very fine reception among our customers for specialty teas, said TreeHouse's Reed who is also developing products that are non-filtered, non- coffee hot beverages. "I think this category is in its nascent stages. We're committed to this category and we're always looking for innovation, either to copy or develop on our own," he said. The only thing inhibiting even faster growth is in-home placement of these single- serve machines by one manufacturer or another, he explained. TreeHouse expects household penetration "to dramatically go up." "Offering greater variety, convenience and value, the attachment rate will go up as well, and we and others will benefit," he told analysts during a recent earnings call. "Consumers will be the ultimate win- ners by having the best tasting coffees and teas available," said Bill VandenBygaart, vp of business development at Mother Parkers Tea & Coffee. The big question on everyone's mind is whether Keurig will succcessfully re- introduce a closed brewing system that would put a damper on sales of non-li- censed capsules. Confronting Keurig In court TreeHouse successfully de- fended its design for capsules compatible with Keurig's first-generation brewers. As Keurig's patents began expiring both TreeHouse and Rogers Family Co. saw an opportunity to help retail clients like Safe- way and Kroger enter the fastest growing segment in coffee. Their success encouraged other pri- vate label manufacturers. Together they wrestled almost 20% of the market from Keurig and its licensed partners. In February TreeHouse filed a new lawsuit alleging that KGM has engaged in anti-competitive practives. In Califor- nia Rogers Family Co., filed a similar suit against Keurig the following month. In both cases plaintiffs hope to prove that "various exclusionary agreements be- tween Green Mountain and various sup- pliers and distributors are designed to maintain Green Mountain's monopoly power in the cup market after the expira- tion of Green Mountain's cup patents." Keurig's "lockout" system is an at- tempt to eliminate consumer choice and to coerce Keurig 2.0 brewer owners into purchasing only Green Mountain owned or licensed K-cups, said Reed.