October 30, 2009

STARBUCKS’ VIA IS NO INSTANT COMPETITOR FOR K-CUP

By Reverdy Johnson, [email protected] 415.364.3782

OUR STARTING THESIS AND APPROACH FOR THE GREEN MOUNTAIN ROASTERS PROJECT This week, Blueshift Research initiated research on Green Mountain Coffee Roasters Inc. (GMCR). The original thesis is that Corp.’s (SBUX) Via instant coffee may pose a threat to sales of Green Mountain’s K-Cup.

This study employed Blueshift’s pattern mining approach to establish contacts within eight independent silos to test this thesis. The silos: 1) Starbucks store checks, 2) department store checks, 3) grocery store checks, 4) retail executives, 5) independent coffee shop baristas, 6) office coffee distributors, 7) industry experts and 8) secondary sources. We interviewed a total of 54 primary sources and included eight of the most relevant secondary sources reviewed.

SUMMARY OF FINDINGS  Via does not pose a threat to K-Cups because K-Cups offer higher-quality taste, more flavor options and versatility, and matches the convenience and ease of use of any instant coffee.  Via received high marks for its taste and should perform well against other instant coffee options likes The J.M. Smuckers Co.’s (SJM) The Folgers Coffee Co., Nestlé S.A.’s Taster’s Choice, and Kraft Foods Inc.’s (KFT) Maxwell House.  Starbucks stores said Via is receiving positive consumer feedback and demands for a decaf version and other roasts, but store associates said it would not compete with K-Cups, which are not instant coffee.  Sources from grocery stores and at least one department store said the K-Cups were not in stock at their locations despite being listed as K-Cup retailers on Keurig’s Web site.  The investment in Keurig’s brewing machine is a hurdle for consumers considering switching from K-Cups to alternate coffee options, including instant coffee.  Kraft Foods’ Tassimo Beverage Machine was noted as Keurig’s closest competitor in department stores while Mars Inc.’s Flavia provides a less expensive alternative to K-Cups in the office environment.

Starbucks Store Checks: Fourteen sources agree that Via has made a favorable first impression with customers, but none said it would challenge K-Cups, which is not viewed or treated as an instant coffee. Customers enjoy Via’s convenience, portability and taste, and the majority of store managers said it would outclass other instant . Sources expect Via to be popular in offices, hotels, and airports, as well as with the weekend traveler. Customers are eagerly awaiting the November release of decaffeinated Via.

• New York 1 o “We met our sales goal the third week Via was out.” o “In the Via taste test 80% of the people got it wrong.” o “You can use it in hot or cold water and even milk. You can’t do that with other instant coffees.”

• New York 2 o “I don’t know if Via will replace other instant coffees as it’s a much stronger blend, but it will definitely catch the Starbuck drinker’s attention.” o “We are getting very positive feedback from Via taste tests we have done.”

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o “People hesitated at first, but once they tried it they were impressed with the full flavor and body.”

• Boston 1 o “Customer reaction has been very positive. Via is above any other instant coffee. In a blind taste test people had a hard time deciphering which was which.” o “K-Cups have a big market of their own. Via is more convenient and consistent with what you purchase in the store.” o “We are seeing a lot of repeat business, especially on the weekends.”

• Boston 2 o “Via is great. It cuts down on the packaging of the K-Cups.” o “We might start doing other coffee roasts.” o “The one thing that trumps Via is that K-Cups come with a variety pack.”

• Columbus 1 o “Putting Via up against other instants, there is no comparison. But K-Cups is not an instant coffee.” o “We are not gaining any new customers because of Via.” o “Via will really take off when they launch it in grocery stores.”

• Columbus 2 o “You can’t compare Via to K-Cups; it’s a different market.” o “Customers are really enjoying it. It is a lot smoother than other instant coffees. It’s not crystallized like Folgers or Tasters’ Choice.” o “People buying Via are looking for convenience.”

• Columbus 3 o “The reaction has been really positive. Customers come in for their morning coffee and leave with a few Via packets as well.” o “Via is going to start taking off in hotels and airports.” o “Customers are requesting a decaf blend and more everyday blends.”

• Chicago 1 o “I’m not sure if there will be an effect on other instant coffee brands.” o “So far the reaction has been good overall.”

• Chicago 2 o “Overall, our customers really like Via.” o “Travelers and folks taking off for the weekend really like the idea.” o “Our No. 1 request is for a decaf blend.”

• Seattle 1 o “Via doesn’t compare to other instant coffees. The taste and feel are far superior.” o “It’s less mess with no filter to throw away. On-the-go types are really responding to it.” o “Via has turned heads of the single cup drinkers.”

• Seattle 2 o “People love Via. It’s a more convenient way to make a single cup of coffee.”

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o “Other instants coffees are made with an inferior bean.” o “We have already seen business offices buying Via to take to work.”

• Seattle 3 o “Customers are reacting well to Via.” o “Via is going over very well for business meetings. Customers can purchase Via and just take hot water and cups. It’s less mess and more convenient, and there is no wasted coffee to throw out later.”

• San Francisco 1 o “Via won’t hurt other instant coffee sales, but it might give them a run for their money.” o “Via has been a big hit. In the Via taste challenge 50% of the people got it wrong.”

• San Francisco 2 o “Via won’t hurt K-Cup sales, but customers like the convenience of the Via in comparison.” o “Customer response has been great; people are buying it.” o “Customers are using Via at work rather than the office vending machine.”

Department Stores: Twelve sources said Via has not hurt Keurig or K-Cup sales. K-Cups continue to be very popular among consumers at the three different chains in four separate cities because of the variety of flavors, good promotions, and quality that is superior to instant coffee. The Tassimo Beverage Machine provides the most direct competition though no source ranked it higher than Keurig.

• Kohl’s, Boston o “There’s been no noticeable change in K-Cup sales in the last month since Via has been available.” o “When [K-Cups] are on sale, they go like there’s no tomorrow.”

• Kohl’s, Chicago o “I don’t think Via has had any impact on Keurig sales.” o “The Keurig’s sell well. We don’t sell them quite as often as our basic ones—like [Jarden Corp.’s/JAH] Mr. Coffee—that do the 12 cups, but anyone that does the single cup usually goes for Keurig.”

• Kohl’s, Columbus o “I’m not aware of the introduction of Via having any effect on K-Cup sales.” o “Keurig is the only single-cup brewer we sell. They’re very, very popular. They range in price from $89 up to $169.” o “K-Cups are our best sellers among coffee and are marked down to $9.99.”

• Kohl’s, Seattle o “K-Cups are much better than instant coffee. The versatility of Keurig brewers can’t be matched by instant options.”

• Bed Bath & Beyond, Boston o “K-Cups sell better than the Tassimo right now because they start at $9.99 for an 18-pack, while the Tassimos are $14.99.” o “It all depends on personal preference. They all basically do the same thing.”

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• Bed Bath & Beyond, Chicago o “The variety of flavors you get with K-Cups gives it a big advantage over something like Via.” o “Keurig and Tassimo are about the same. A lot of people tend to like the Tassimo flavor packs. I’m not sure if it’s the taste or if it has more flavor options than the Keurig does.”

• Bed Bath & Beyond, Columbus o “People tend to buy the K-Cups a little more because they know the brand name better.” o “Keurig and Tassimo are basically the same, just different manufacturers. We probably sell more of the Keurigs.”

• Bed Bath & Beyond, Seattle o “I don’t think Via can compete with Keurig brewers.” o “Keurigs are really good. It’s definitely better than instant coffee. You have the flexibility to do coffee, tea, hot chocolate.” o “Keurig sells better than Tassimo because they have several different models and a much wider selection of coffee choices.”

• Macy’s, Boston o “Via is not going to appeal to Keurig buyers because they like taste and variety.” o “K-Cups are very popular with no signs of slowing down.” o “We sell a lot more of the Keurigs than Tassimos.”

• Macy’s, Chicago o “Keurig is our best seller. It’s just so simple. A lot of hotels have it, so people recognize it from there.” o “Keurig offers a filter, so when you want to put any kind of coffee in, you can brew your own.”

• Macy’s, Columbus o “Keurig is the most popular, definitely.”

• Macy’s, Seattle o “Via might be popular with people on the road, but when they’re at home, people want a better cup of coffee and K-Cups are better than instant.” o “We sell the Keurig and [Conair Corp.’s] Cuisinart at a pretty steady equivalent pace.”

Grocery Stores: Only six of our 16 grocery store sources carry K-Cups, conflicting with information from Keurig’s Web site. Those who stock K-Cups reported good sales because of the variety in flavors. Most sources had not heard of Via and could not confidently comment on its effect of K-Cup sales. We included interviews with five of the 10 sources who do not carry K-Cups.

• Wegmans Food Markets, New York 1 o “We do really well with the K-Cups. We carry different varieties of them, so that’s a big part of their sales. [Sara Lee Corp.’s/SLE] Senseo packs do better. They have different varieties as well. o “I have never heard of Via, but our Starbucks bulk coffee doesn’t do that well.”

• Wegmans, New York 2 o “K-Cup sales are just OK.

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o “I couldn’t say if Via will affect K-Cup sales.”

• Wegmans, New York 3 o “Green Mountain is better than other single-serving coffees. The flavor is better. Our own brand just doesn’t compare to Green Mountain.” o “Green Mountain is more expensive, so the customers tend to go for Folgers, [R.C.] Bigelow [Inc.] or our brand.” o “I’ve never heard of Via. We carry Starbucks coffee in bulk, but [J.M. Smuckers’] Dunkin’ Donuts coffee does a lot better.”

• Meijer, Columbus 1 o “We don’t carry K-Cups, but we do have Maxwell House, Taster’s Choice, Senseo and [Ülker Bisküvi Sanayi A.S.’s] Godiva. We might carry it online; the online store tends to have more options than what is carried in each of the stores.”

• Meijer, Columbus 2 o “We don’t carry K-Cups, and I’ve never heard of them.”

• Fred Meyer Stores, Seattle 1 o “We carry Green Mountain coffee in our nutrition center in bulk, but I have never seen the single servings. What we carry here for single-serving coffees are the Senseo, Maxwell House and Taster’s Choice.”

• Fred Meyer, Seattle 2 o “We don’t carry K-Cups, but we do have Folgers and Nescafé. I have seen Via in Starbucks stores. It looks like a great idea, but I don’t know about the taste. Most people who drink coffee want something fresh brewed, not just added to hot water.”

• Target, Seattle o “Sales of K-Cups are good. They have a variety of flavors, and it comes in a variety pack. The price is very competitive, and people seem to like them.” o “Via is hopefully going to be in our stores for the holidays. Since we don’t have it yet, it would be hard to tell if it will sell better than the K-Cups.”

• Target, Boston 1 o “A lot of K-Cups go out on the shelves. We stock it all the time. I haven’t heard of Via. I’m sure we will carry it soon if it is out on the market.”

• Target, Boston 2 o “We don’t have K-Cups.”

Retail Executives: One source reported problems getting Keurig machines from the distributor, while another said Via will not threaten K-Cups because Keurig customers are more discerning and not likely to drink instant coffee.

• The buyer of small electrics products for a department store that operates in 23 states and has carried Keurig machines and K-Cups said the distributor no longer supplies his store. He did not know why he no longer receives shipments and said K-Cups were a top seller when he had them in stock.

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o “Since December of 2008, they have not shipped to us. It’s the only vendor I have that won’t ship to me.” o “When I had K-Cups, it was the hottest category I had.”

• A representative of a specialty coffee maker and wholesaler that is one of four companies licensed to produce and sell K-Cups said instant coffee is not a direct threat to K-Cup’s momentum because people willing to spend $100 or more on a Keurig brewer are serious about taste and quality, as well as convenience. Single-serve K-Cups started in the office segment, but growth now is in the at-home market, for which his company’s revenue from K-Cups was up more than 200% in its fourth quarter. o “From the get-go, Keurig, through their four licensed roasters, has kept one thing constant and that’s to produce high-quality coffee. You’re never going to see a Folgers or Maxwell House in these Keurig systems.” o “In the last couple of years, after Green Mountain bought Keurig in 2006, you’ve seen them really push the K-Cups channel through the big-box retail stores like Target and Bed Bath & Beyond, and now through grocery stores and club stores. And you’ve seen a huge following from people who had it in their office and liked the convenience or just a viral effect of word of mouth.” o “The cheapest Keurig system you can get is about $100. Your typical low-end consumer isn’t going to want to spend $100 when they can get a perfectly fine drip system for $20.” o “Why would you go to a Starbucks to buy an instant coffee when you can get their coffee right there?” o “Starbucks just isn’t that good of a coffee to begin with. They actually burn their beans, which is why it has a little bit of a charred flavor.”

Baristas: Three sources said K-Cups will not lose share to Via because single-serving brewed coffee is better than instant and that K-Cups offer more options. However, they said Via could challenge other instant coffees and be attractive to current Starbucks drinkers.

• A professional barista at a chain of six coffeehouses in the Midwest said Via is likely to be popular with customers who already drink Starbucks and could convert drinkers of competing instant coffee. However, K-Cups is a cut above and should not lose much business to Via. o “K-Cups are popular because of convenience and branding. It is an easy way to make coffee and it can be branded Fair Trade and organic. Via could capture some of this market because of the strength of Starbucks’ brand, but I think K-Cups still seems classier than instant coffee.” o “The Colombia Via tasted remarkably like Starbucks coffee. You might as well only pay $1 a cup for this than drive to a location and pay $2.” o “Via will be attractive to people who enjoy the Starbucks brand, but not to those who enjoy specialty coffee brewed and roasted with care.” o “It could lead instant coffee drinkers to buy Starbucks brand coffee. This is a big demographic, and it makes sense for Starbucks to go after it. I imagine [this group] is easier to win over than the leading-edge and sophisticated demographic.” o “I could see employers switching to Via to appease the desires of employees to have better coffee.”

• The head barista at two Southern coffeehouses has heard negative feedback about Via’s quality and taste, and believes K-Cup has a sizeable advantage because its variety of flavors. o “Via isn’t too much of a threat, because K-Cup has more options. Via is just one or two flavors. The variety of coffee available in K-Cups might give it the upper hand.” o “Fellow coffee professional friends of mine have taken the challenge and thought Via tasted pretty rough. But then again, most of my fellow coffee professional friends think Starbucks’ 321 Pacific Ave., San Francisco, CA 94111 [email protected] October 30, 2009

regular brewed coffee tastes burnt, so an instant option that also tastes burnt really isn’t going to win us over.” o “Those attracted to Via are people who are already Starbucks drinkers. This might get Starbucks’ drinkers drinking more coffee at home if it’s cheap and tastes the same as other burnt Starbucks’ coffee. I’m skeptical whether local specialty coffee shops will lose any customers to Via, because superior taste is just one of many reason customers choose coffee shops over Starbucks.”

• A professional barista at a Southeastern coffee shop said Via is better than most instant coffees and matches K-Cup for convenience, but trails K-Cup in terms of taste and flavor options. He believes Starbucks’ marketing will have to convince consumers that the taste is better in order to steal K-Cup customers. o “I was not overly impressed with Via. It was one of the better instant coffees that I’ve tasted, perhaps even superior to some convenience store products, but it did not compare to a decent cup of brewed coffee. I do not think it will be a substitute for a real cup of coffee for most consumers.” o “K-Cups are popular because of their taste, choice, and convenience. The system is easy to use and makes a decent cup of coffee. It’s perfect for office and waiting room settings, where brewing a full batch is not practical.” o “Via matches convenience, but that’s it. I don’t think it will have much impact on existing [K- Cup] customers unless the Starbucks marketing effort can successfully convince customers that the product is superior.”

Office Coffee Distributors: Three sources said Via will not take K-Cup’s market share in the office environment because brewed single servings have become increasingly popular and prevalent. Two sources said K-Cups make up the majority of their business, while the other sells more of Mars Inc.’s Flavia because it is cheaper than K-Cups. They agree Via tastes good for an instant coffee, but said offices are no longer buying instant coffee and fear employees would take Via packets home.

• The vice president of an office coffee distributor and authorized seller of Keurig brewers and K-Cup coffees said single-cup coffee sales are 80% of his business and growing, and K-Cups account for more than 90% of his single-cup sales. His clients no longer buy instant coffee, but he was pleasantly surprised by Via’s quality and plans to carry it in vending machines. o “One of the main reasons that Keurig is so successful is brand recognition. Convenience, consistency of the product, and ease of use are important for all single-cup makers.” o “I am really intrigued by Via. The quality was much better than I expected, and I don’t particularly like Starbucks. I’m not a big fan of their ground coffee.” o “Pushing instant coffee again is a step back, really. [The introduction of Via] is very curious since we’ve worked so hard over the years to improve not only the quality of the coffee but the perception of it. We’ve gotten away from instant coffees. They really don’t buy instant coffees [in offices] anymore.” o “I am a Starbucks distributor and I am going to be carrying the product. We’ll probably put it in vending machines.” o “Are people switching from single cup back to glass pots to save money? That hasn’t really been my experience. This year’s been a tough year, but I haven’t seen much switching back. Once they have the single cup with its convenience, ease of use and quality, people don’t want to give it up.”

• The president of a company that supplies coffee to offices said K-Cups make up most of his single-cup coffee sales. He does not foresee a market for Via in offices because it is more expensive than K-Cups

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on a per-unit basis and will have a hard time competing with the variety and brand names available for the Keurig system. o “In terms of single-cup sales, Keurig is definitely the majority of what we’re doing right now. There are other products out there that people are requesting, but K-Cups are at the forefront.” o “When you put it all together—quality, convenience, variety and brand equity—Keurig’s got it all. There are probably 150 to 200 selections available for the Keurig machines when you add all the roasters, coffees, teas and hot chocolates. That’s a very broad product line.” o “We get very few requests for instant coffee. I know Starbucks has this new product, but I do not see it being something that [will be popular in offices]. The bottom line is that the cost per unit on [Via] is significantly higher than on K-Cups.” o “The quality is decent, but if you can get quality that’s as good as or better with a lot more variety [with K-Cups], it’s going to be tough for me to convince a customer to spend more.” o “[Via’s] price point is not where it needs to be, and I can’t see an office putting them out. People will be sticking them in their pockets, taking them home, and the owner of a company is going to be spending 70¢ per serving with double the amount going out the door. I don’t see it as being an integral part of what we sell into the office market.” o “I really don’t see a whole lot of excitement being generated over that product.” o “You will not find me drinking Via. I think a lot of other serious coffee drinkers are going to feel the same way. They may try it once or twice, but is it something they’re going to use regularly? My guess is no.”

• The Northeast regional director for an international food service distribution company providing coffee and equipment to offices said Via is a quality product but is unlikely to penetrate the office market because the packets are too easy for employees to take home. He sells more Flavia single-cup coffee than K-Cups because Flavia is significantly cheaper. o “We see a lot of K-Cups. They do a fantastic job of marketing their products. K-Cups probably represent 30% of my single-cup sales, and my single-cup business is huge. I would say 70% of my single-cup business is with Flavia.” o “I think [that 70%/30% mix] has stayed pretty flat. People have come to me in the last six or seven months looking to save money, and we have changed them from K-Cups to Flavia. K- Cups cost the client the most amount of money. K-Cups are 15% to 18% higher. The equipment is the same price.” o “Another problem is that Green Mountain has grown their home business phenomenally. Every home has one of these K-Cup machines, so my clients get nervous that the coffee they provide to employees is going home.” o “Instant coffee has gone by the wayside [in the office market]. I will say [Via] is absolutely delicious. They’ve done a fantastic job with instant coffee. But if I’m bringing in these Via packets that are three inches long and just laying them out on the counter, what is the client who is paying me going to think? That people are going to take them home. That’s a big concern in the office coffee market.” o “If anything, Via could hurt K-Cups in home market sales but not the office coffee sales. I thought the quality of the Via coffee was excellent. It’s fantastic.” o “Around the country, about 80% of the coffee is glass-pot business, and 20% is single cup. No matter what we do, that number stays about the same. But in this region, single-cup represents anywhere from 65% to 70%. The West Coast is still into Peet’s [Coffee & Tea Inc./PEET] and Starbucks by the pot.”

Industry Experts: Four sources said Via will not harm the sales of K-Cups, which are convenient, easy to use and good quality with ample options. Via customers will be those that already drink instant

321 Pacific Ave., San Francisco, CA 94111 [email protected] October 30, 2009 coffee and current Starbucks consumers. These sources believe Via’s quality is good among instant coffees.

• An industry consultant who also owns a retail operation said K-Cup thrives because of its combination of quality and convenience whereas Via only provides convenience. He said Via will not pose a threat to K-Cups in the home or office and believes Via’s customers will come primarily from those already drinking Starbucks coffee. o “K-Cup has correctly identified the middle ground where convenience buyers want better coffee but still don’t want to be bothered by making it. These are cool machines that give the customer a pretty good cup of coffee, the potential for a selection of coffee to fit the mood or meal, and the no-mess, instant gratification that the convenience buyer craves.” o “Does Via dent this? Probably not. K-Cup buyers are invested and probably won’t find any better flavor and no more convenience with Via. The only people that would choose Via are either lazy or find the Keurig machine out of financial reach.” o “Starbucks buyers are folks that have graduated from Taster’s Choice and Folgers. Since the buying group is familiar with the [instant coffee] concept, Starbucks may get their existing customers to buy Via. Will they move more consumers from commercial to Starbucks with this? I doubt it, but I’m sure the Starbucks marketing people disagree.” o “One of my customers was lured by the marketing and bought two boxes of Via. They used three out of each box and stored the others away as part of their earthquake kit. They were curious, but they won’t be buying again. I don’t see it taking off.” o “I was just at one of the four licensed manufacturers of the K-Cup. They produced 300 million K-Cups last year and are adding lines to more than double capacity in 2010. I cannot see them as worried [about Via].” o “If you tasted Via vs. any Keurig product, you would see that the quality battle goes to K-Cup. Convenience goes to Via because you don’t need a machine. Consistency is a draw.” o “Via will never replace a Keurig installation [in an office]. I just don’t see workers feeling the love of their boss for providing instant coffee.”

• A board member and treasurer for a leading trade organization for specialty roasters and retailers said Via is one of the best instant coffees he has tasted, but is most likely going to be popular among people who already drink instant, rather than K-Cup drinkers. Via may do well with travelers and salespeople, but K-Cup is entrenched in the office environment because of its cost, convenience, quality and selection. o “Keurig offers more flavor options, and the product is better. I believe the K-Cup is still cheaper than Via as well. There is also a perception to overcome that it is still instant coffee. Is Via a threat to K-Cups in the office environment? Maybe a little bit.” o “As far as instant coffee goes, it is better than most, if not all, of them. It’s still not as good as fresh-brewed product. When compared against Starbucks’ own brewed coffee, you can tell the difference between them, but Starbucks’ brewed coffee is not that great to start with.” o “The majority of Via customers will come from ones that already consume instant. It may do well in markets like the airline industry, with frequent travelers, backpackers, salespeople that are in the car a lot. It’s not a great product.” o “K-Cups are popular for a few reasons: cost, product quality, selection, convenience. It’s easy to make, there’s no mess and it’s right down the hall.” o “They aren’t cheap on a unit-per-unit, or cup-to-cup, basis. They are actually kind of expensive compared to buying [ground] coffee and brewing it. In an office environment the staff may only drink half of [what’s brewed] and throw away the rest. The cost per cup may have been cheaper making it this way, but when you factor in the waste, the K-Cup is probably cheaper.”

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o “The Starbucks brand is so big and so many people believe it is a quality brand that you may actually have people believe that instant coffee is just as good as specialty coffee because it has Starbucks’ name on it, which really isn’t good for anybody in the industry that pushes quality. ‘Good enough’ will become good enough.”

• The president of a specialty coffee consulting agency and barista training service said Via is mostly targeted at Starbucks’ own customers. If Starbucks tries to take on K-Cup, it may have some advantage in convenience but will have to overcome the perception of K-Cup’s higher quality. o “I think that the popularity of Via will depend on Starbucks’ marketing campaign. Right now, it seems like they are trying to find a following among the customers they already have by switching them from whole bean coffee and focusing on convenience. They will eventually have to target other consumers, such as K-Cup drinkers. In order to make consumers switch, Starbucks will have to prove that their regular brewed coffee is superior and more convenient.” o “I think K-Cup customers are mostly interested in convenience. K-Cups aren’t substantially different in price from regular coffee. The attraction to them is the consistency and ease-of use. Via is supposedly even easier and cleaner, so it could eventually be preferred. However, K-Cups have an advantage in that most people who currently use it have the brewers in their homes or businesses. They may be less willing to abandon them for something else.”

• A consultant to coffee roasters, retailers and distributors said Via’s quality is not on par with K-Cup’s, but believes Starbucks’ brand name and distribution network will make it a strong competitor. He also believes Starbucks eventually will move into the coffee-by-the cup market. o “Via is no immediate threat [to the specialty coffee market] as they are actually down-selling, thus taking their eye off the specialty coffee segment.” o “As with any soluble product, Via lacks ‘mouthfeel’ due to its low TDS [total dissolved solids] reading. The coffee is ground into powder basically, which creates more of an instant brown water than coffee.” o “It’s not the same target demographic. Starbucks sees the opportunity in a mostly blue-collar category.” o “K-Cups are one of many coffee cartridges. Their net effect is to gather the office coffee segment first and the home user second. Starbucks will do well comparatively as they have name recognition and a conduit to get the product to the masses. People that have created behaviors around preparing their coffee this way will be thrilled by Starbucks’ entry into this segment.” o “Sometime in the near future Via will dispense in a similar way to the coffee-by-the-cup mentality, in addition to the single-serve instant package. So in simple economics, Via will be a formidable foe from an exchange goods aspect. In fact, I doubt they plan on any less than half of the total channel.”

Secondary Sources: Eight sources made comments about K-Cup’s growth, praised K-Cup’s convenience, variety and affordability, told of Starbucks’ setback with its Clover single-cup dispenser and the Nov. 17 release of its decaffeinated Via.

• An Oct. 13 Investors.com article highlighted the growing popularity of K-Cup, Green Mountain Coffee and Diedrich Coffee Inc. (DDRX), a K-Cup maker. http://www.investors.com/NewsAndAnalysis/Article.aspx?id=508891 o “They don’t have quite the brand-name recognition of iPods, but K-Cups seem to be making a spirited challenge to the Apple devices for the title of hit product of the decade.”

321 Pacific Ave., San Francisco, CA 94111 [email protected] October 30, 2009

o “So what are K-Cups? And how is it that they have propelled shares of Diedrich Coffee from a close at 31¢ on March 16 to a recent price of nearly $25 a share? K-Cups are single-serve packets of coffee designed for Keurig single-cup coffee brewers. … Irvine, Calif.-based Diedrich is one of four Green Mountain licensees that make the disposable K-Cups for the brewers.” o “Sales of both the brewers and K-Cups are at full boil. Green Mountain reported sales growth near 60% last quarter. Diedrich last quarter reported 57% revenue growth, leading to only its second profitable quarter in the last five years. K-Cups account for more than 90% of Diedrich revenue.” o “For K-Cups to sustain strong gains, the Keurig brewers will probably have to come down in price. To this end, Green Mountain has licensed low-end kingpin Mr. Coffee to make a new one-cup brewer. … A lower-cost Mr. Coffee version of the brewer could hit the market by Christmas, according to the Diedrich spokesman.”

• An Oct. 21 Article Alley article stated Keurig and K-Cups provide convenience and variety as a preferred alternative to buying a cup of coffee in a store. http://www.articlealley.com/article_1192553_26.html o “Drinking connoisseur coffee outside is pricey, and drinking instant coffee at home is not the same. So here’s some good news for the more than 32 million folk in the U.S. It’s called K- Cups.” o “Analysis shows that up to three working days are lost in each office each year by folk going outside to seek a decent cup of coffee.” o “From this question, the revolutionary concept of Keurig K-Cup portion pack brewing was born. This system enables you to experience glorious connoisseur coffee one cup at a time. The system is really easy.” o “Also, there are no more wasted pots of coffee and no more coffee pots to laboriously clean out time upon time. Not only that, you aren’t stuck with one flavour of coffee for all. Individual K-Cups allow you to choose your favorite flavour whenever the mood takes you.”

• An Oct. 15 article on iStockAnalyst.com touted K-Cup for its ease-of-use, quality and affordability. It also highlighted how Green Mountain is a sound investment because of its recurring income from each cup sold to accompany the Keurig machine. http://www.istockanalyst.com/article/viewarticle/articleid/3553704 o “The biggest reason for this growth is the company’s Keurig Single-Cup Brewing System, which is leading a revolution in the way consumers prepare their coffee. If you’ve used one, you know how easy it is. Consumers can now get a perfectly brewed cup of coffee in less than a minute, at home or at the office, and at a cost of less than 50 cents.” o “At the heart of the Keurig system are the individual K-Cups, single-portion packs that are available in hundreds of varieties from over a dozen coffee brands, including Diedrich, Gloria Jean’s [Inc.], Timothy’s [Coffees of the World Inc.], [Inc.], [TC Global Inc.’s] Tully’s, Newman’s Own [Inc.] and [Timothy’s] Emeril[’s Coffee].” o “And the greatest part of this single-serving business model, from an investor’s point of view, is the recurring income. Years ago, Gillette made a killing in razor blades. Kodak cleaned up in the photography film business. And now Green Mountain is raking in the money.” o “The firm makes six cents for each K-Cup sold by its licensees, and even more profit when its own coffee is purchased, at an accelerating rate. The firm sold 400,000 Keurig brewers in the last quarter alone, and we expect them to be hot gift items in the upcoming holiday season.”

• A Sept. 11 Internetretailer.com article reported Green Mountain was introducing a single checkout for its four online shopping sites. http://www.internetretailer.com/dailyNews.asp?id=31776

321 Pacific Ave., San Francisco, CA 94111 [email protected] October 30, 2009

o “Taking a page from The Gap’s e-commerce strategy, Green Mountain Coffee Roasters Inc. now lets consumers shop on four Web sites with a single shopping cart. The cross-site checkout was introduced this week as the retailer created three new standalone e-commerce sites to go along with its primary Green Mountain site.” o “The new sites are Tullys.com, which sells products of the Tully’s coffee brand Green Mountain acquired earlier this year, as well as NewsmansOwnOrganicsCoffee.com and CaribouKCups.com. Green Mountain has a licensing agreement to sell Newsman’s Own and online. K-Cups are the single-serve packages used with coffee makers from Keurig, which Green Mountain also owns.” o “Each of the four sites has tabs on top featuring the four brands, enabling consumers to move among the four sites easily. The sites also feature text in the top right saying ‘Four Stores. One Checkout’ to inform customers that they can use the same shopping cart across the four sites. All four sites also promote the company’s Café Express loyalty program, which has more than 140,000 members.” o “‘Gap was really the model for this,’ says Ken Crites, director of consumer direct at Green Mountain, No. 120 in the Internet Retailer Top 500 Guide. Gap (No. 25) last year introduced a single shopping cart for its five e-commerce sites selling products from its Gap, Banana Republic, Old Navy, Piperlime and Athleta brands.”

• An Oct. 20 blog on U.S. News and World Report’s Web site highlighted Keurig single-cup coffee as one of the 10 products that has boomed during the recession. http://www.usnews.com/money/blogs/flowchart/2009/10/20/10-products-that-boomed-during-the- recession.html o “Java giant Starbucks has been struggling, but that doesn’t mean coffee has fallen out of favor. Vermont-based Green Mountain Coffee Roasters has been boiling hot thanks to its Keurig single-cup brewing systems, popular in many offices and increasingly in private homes.” o “Sales from the Keurig division have nearly doubled since last year, and Green Mountain’s overall revenue has increased 86 percent during the recession, according to Capital IQ. Green Mountain’s stock has been wired, too, rising nearly 190 percent since the start of 2008.”

• A Sept. 21 Drinks Business Review article stated that Green Mountain was introducing a new line of K- Cup beverages, including lattes and hot chocolate. http://www.drinks-business- review.com/news/green_mountain_coffee_roasters_introduces_new_line_of_kcup_beverages_090921 o “Green Mountain Coffee Roasters has revealed that a new line of K-Cup beverages is now available. Cafe Escapes is a collection of lattes and hot cocoas in K-Cup portion packs for use with Keurig Single-Cup Brewing Systems.” o “The company said that the gourmet coffeehouse drinks include Cafe Mocha, Chai Latte, Dark Chocolate Hot Cocoa and Milk Chocolate Hot Cocoa.” o “The company claims that the twelve-count boxes of Cafe Escapes K-Cups are available at supermarket locations. Sixteen-count boxes are available at other retail locations.” o “Joel White, director of product marketing for the specialty coffee business unit of Green Mountain Coffee Roasters, said: ‘Consumers have been requesting more coffeehouse concoctions they can make in their Keurig brewer. The Cafe Escapes product line fills that niche and satisfies the desire for a sweet, hot cafe beverage that can be brewed quickly and conveniently.’”

• An Oct. 13 post on Boston.com said Starbucks was removing its Clover brewing system from seven Boston area stores. http://www.boston.com/business/ticker/2009/10/starbucks_will.html

321 Pacific Ave., San Francisco, CA 94111 [email protected] October 30, 2009

o “Starbucks Corp. said it is withdrawing its Clover brewed premium coffee offering from seven of its Greater Boston stores as it looks to fine-tune a test program of the Clover system.” o “Another 26 Starbucks stores in the area will continue to offer Clover brewed coffee, the company said, and the seven Clover systems being removed will be redeployed to other area Starbucks in the coming months, the company said.” o “Last year, Starbucks bought the company that owned the Clover brewing system as part of a larger plan to revitalize the Seattle-based chain by offering coffee aficionados an additional high-end option.” o “According to published reports, the Clover makes one cup of coffee at time to a customer’s specifications. The Clover makes coffee from both traditional Starbucks blends and from blends specially designed for the Clover system. In the opinion of some caffeine buffs, the Clover brewing process can tease out bean subtleties that traditional brewing systems can’t match.” o “‘Starbucks remains committed to the Clover Brewed Program, and we look forward to expanding the program to more than 250 Starbucks stores in 2010,’ the chain said in a statement.”

• An Oct. 12 article in the Sacramento Business Journal reported Starbucks will begin selling a decaffeinated version of its Via instant coffee Nov. 17 at the same price as the two caffeinated roasts currently available. http://sacramento.bizjournals.com/sacramento/stories/2009/10/12/daily17.html?ana=from_rss o “Decaf instant will go on sale in the United States on Nov. 17. Three single-serve packets of the decaf will cost about $3, while a 12-pack will cost around $11.”

NEXT STEPS Our follow-up report in a few months will begin with a look at Via’s sales progress, including a check of its release of a decaf version and additional roasts. We will pursue interviews with additional distribution channels such as grocery stores to gauge customer response and compare Via’s sales to other instant coffees and K-Cups. An important element in our next report will be to check on the distribution problems we found with K-Cups at supermarkets and department stores to learn if the inconsistencies continue. We will revisit stores where K-Cups are sold to measure any changes in sales. We also will add a silo of Internet retailers, through which K-Cups are most commonly sold.

321 Pacific Ave., San Francisco, CA 94111 [email protected]