The Private Label K-Cup Tightrope Walk

This blog is based on the report Single-Cup Brew Beverage Products in the U.S.: Coffee Pods and Beyond, 2nd Edition. To purchase the report or for more info click here.

March 18 - Private label is the new single-cup coffee segment power player: In just three years, private label single-cup coffee has gone from nonexistent to major market force, according to Packaged Facts. The market research publisher found that:

• As recently as August 2012, private label comprised well under 1% of single-cup sales.
• Fast forwarding to July 2015, private label generated some 12% of single cup coffee sales, up from 9.2% during the year earlier period.

Clearly, something is afoot.

And the private label power player is . . . Keurig? 

Private label began to explode when Keurig’s K-cup patent expired, providing room for companies such as Treehouse Foods and Rogers Family Company to pursue private label relationships with major retailers keen to benefit from higher single-cup margins without having to kick back a royalty to Keurig.

Keurig Green Mountain hoped that Keurig 2.0, initially intended to work with only licensed cups-would close the door on this kind of behavior-and bring more private label accounts under its licensing umbrella. But private label remains a licensing battleground. Here, Keurig also plays both sides of the field.

• Keurig has been the exclusive manufacturer of Costco Kirkland Signature brand K-Cup packs since 2012, and brands provided by Target, Walmart and Kroger have been licensed to work on Keurig machines well before the 2.0 rollout. But 2014 saw a spate of deals, with Keurig partnering with major retailers BJ’s Wholesale, Meijer, Supervalu and Harris Teeter.
• Through Q3 2015, Treehouse Foods has suffered from losing deals to Keurig, and points to significant erosion in private label pricing power as a margin culprit. In a September 2015 investor presentation, it cited a growing price gap between national brands and private label, widening from $0.11 in July 2013 to $0.19 in July 2015.

Private label single-cup coffee brings industry opportunity and challenge: by moving into private label, single-cup has the potential to reach a wider swath of customers attracted to the value-oriented price points that private label provides. But growth in this direction is a double-edged sword: lowered priced private label single-cup coffee may translate to lower margins, especially if private label growth cuts into brand leadership and forces brand leaders to lower their prices in the bargain.

More broadly, however, we believe the coffee industry still wins: the single-cup format still carries a price per ounce that leaves other formats in the dust, so moderate losses in price per unit nevertheless translate to higher prices per ounce for the market as a whole. The key involves ensuring the market for single-cup K-cups/pods (and brewers) continues to expand enough for sales growth to make up for pricing power losses.

But Keurig may be driving down the price of private label single-cup coffee. While that may be good for retailers that have signed private label agreements with Keurig and seek volume-driven inroads, it does not bode well for single-cup national brands.

By competing so aggressively in private label while maintaining national brand partnerships, Keurig may be playing a tricky, tricky game, where growing pricing differences and growing private label variety may cause defections among consumers from partner brands to private label offerings, and where playing the pricing game on both sides of aisle to this extent could raise other red flags.

-- David Morris