Yesterday, in a call with market analysts discussing Keurig's plunging sales over the last fiscal year, Kelley tacitly admitted that Keurig's attempt to increase its market share by limiting Keurig-machine owners' drink options to officially licensed Keurig beverages had backfired spectacularly.
You're surely familiar with Keurig and its K-cup single-serving coffee (or tea or cocoa) pods. The company's patent on K-cup technology expired in 2013, which is why off-brand or refillable K-cup-style pods exploded all over the market since then. That's also why Keurig's fourth-quarter results for fiscal year 2013 suggested that up to 12 percent of all coffee or tea pods brewed in Keurig machines came from “unlicensed third-party” sources.
Hoping to reverse this trend, Kelley announced in March 2014 that the company “will be transitioning our lineup of Keurig brewers over fiscal 2014 and early 2015. While we're still not willing to discuss specifics about the platform for competitive reasons, we are confident it delivers game-changing performance.”
The game changed
And he was right: the game did change, though not to the benefit of Keurig or its stockholders. That June, Keurig stopped selling its original single-serving hot-drink machines in lieu of Keurig 2.0 models, designed to only work with K-cups equipped with the drink-pod equivalent of digital rights management (DRM) restrictions.
What does that even mean? To make an analogy: imagine that your stove used to be able to cook any brand or type of food you wanted. But when you bought a new stove, you discovered it would only cook foods officially licensed by the stove manufacturer; try heating any off-brand food, or even your own garden-raised vegetables, and you can't so much as turn the stove on. (Adding insult to injury, imagine furthermore that the stove manufacturer had the unmitigated gall to claim these limitations were for your own personal benefit, as when Brian Kelley in March 2014 said that Keurig 2.0's brand restrictions would “ensure the system delivers on the promise of excellent quality beverages produced simply and consistently every brew every time.”)
That's how Keurig 2.0 machines operate: Instead of using any properly shaped pod or K-cup, including those relatively inexpensive refillable ones that work with any brand of coffee, tea or cocoa you like, Keurig 2.0 machines were designed to only work with officially branded cups, so Keurig wouldn't just make money off the sale of its 2.0 brewing machines, but also collect a licensing fee every single time those machines are used.
At least, that's what Keurig hoped would happen. This is what actually happened: the company released its brand-restricted 2.0 machines last June, and the “DRM” restrictions turned out to involve printing the pod labels with a special proprietary ink. Although Keurig wouldn't explain the specific details of how it worked, one executive did say that it involved shining infrared light on the ink and measuring the wavelength reflected back.
Reverse-engineered
It took less than two months for competing coffee companies to figure out how to reverse-engineer Keurig's proprietary ink (or at least its infrared-reflecting qualities) and produce non-branded pods that work in Keurig 2.0 machines.
Other Keurig 2.0 users discovered an even easier workaround: simply remove the label from a specially branded pod that is compatible with 2.0 machines, place it atop an off-brand pod, and the machine will “read” the proper infrared wavelength and work normally. Better yet, use a piece of ordinary transparent tape to attach the infrared-printed part of the label over the machine scanner.
While Keurig 2.0 owners used simple hacks to continue making off-branded drinks, other hot-drink fans simply opted out of buying Keurig 2.0 machines altogether. Here's a typical comment one ConsumerAffairs reader made in December 2014:
Will never buy another Keurig. Mine just died on the counter at age 2 . all the lights lit up on the panel and began blinking at once. Keurig did not take responsibility, but offered me a new 2.0 model at a small discount. When they told me only special new pods would fit in it, they sealed the deal for me: no more Keurig, ever.
She wasn't the only one to make that decision. In its quarterly earnings report released yesterday, Keurig Green Mountain admitted that from March 2014 to March 2015, sales of its brewers and accessories declined by 23%, and “accessory net sales declined 31% compared to the prior year period.”
The Washington Post reports that during yesterday's call with market analysts, CEO Kelley didn't go so far as to admit that the entire DRM-limitation model was a bad idea — but he did admit that Keurig should not have discontinued production of its reusable “My K-cup” pods:
We heard loud and clear from consumers who really wanted the ‘My K Cup’ back. We want consumers to be able to bring any brand and bringing the My K-cup back allows that.
My K-cup was a terrific addition for the consumer. It wasn’t used a lot, but for the consumer it was a nice element to have if they were given coffee as a gift….We took it away because My K-cup wasn’t going to work with our new system. Quite honestly, we were wrong. We underestimated the passion the consumer had for this. We missed it. We shouldn’t have taken it away. We’re bringing it back.
Verily, it requires a very special kind of insight to guess that the owner of a coffeemaker or any other home-kitchen appliance might want to use it to prepare more than one particular brand of edible substance.
Keurig apparently has no plans to scrap its ludicrous and easy-to-avoid infrared-based DRM restrictions, but it will at least start making reusable My K-cups that are compatible with 2.0 machines. Whether this will help the company regain the goodwill and market share it lost when it imposed those restrictions in the first place remains to be seen.