Gmcr's recent statement of cash flows

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C296 Case 36:: Green Mountain Coffee Roasters and Keurig Coffee

sourced and roasted to Dunkin’ Donuts exacting specifi- cations. Nigel Travis, Dunkin’ Brands CEO and Dunkin’ Donuts president stated,

We believe customers will be delighted to learn that ‘America’s Favorite Coffee’ will soon be able to be pre- pared in America’s fastest-growing single-cup brewing system. By introducing Dunkin’ K-Cup portion packs and making them available exclusively in our restau- rants, we are giving people more occasions to enjoy Dunkin’ Donuts coffee and more ways to enjoy using the Keurig Single-Cup Brewing System. We believe this alliance of two brand leaders means incremental sales of GMCR, for Dunkin’ Donuts and for our Dunkin’ Donuts franchisees.

GMCR president and CEO Larry Blanford stated, Dunkin’ Donuts has top quality coffee, an extremely loyal customer base and impactful advertising programs. Combine those assets with consumers’ enthusiastic response to Keurig’s Single-Cup Brewing technology and we believe this alliance represents a truly exciting opportunity for both companies, with the potential to strengthen Keurig brewer adoption by consumers in one of the fastest-growing categories of the coffee industry.

According to The NPD Group/CREST, Dunkin’ Donuts served the most hot traditional and iced coffee in America (for quick-serve restaurants, year ending October 2010), selling more than one billion cups of hot and iced coffee every year. Dunkin’ Donuts was recently ranked number one in customer loyalty in the coffee category for the fifth consecutive year by the 2010 Brand Keys Cus- tomer Loyalty Engagement Index. Additionally, in 2010 Dunkin’ Donuts opened more net new locations globally than any other quick-serve brand.

While Wall Street rewarded the stock price of GMCR on the news of the strategic relationships, Larry Blanford could not ignore the risks related to GMCR’s Keurig busi- ness. Although GMCR was based in Waterbury, Vermont, with a geographic footprint weighted almost exclusively to the U.S. and Canada, several global developments posed risks to Keurig’s future growth. Blanford was concerned about several issues. including product liability, protecting GMCR’s intellectual property, GMCR’s ability to integrate their acquisitions, and the effect of commodity costs on Keurig brewers.

Coffee Consumption in the United States The U.S. population consumed more coffee than soft drinks in 1969. According to Jack Maxwell of Beverage Digest, U.S. consumption of coffee in 1969 was approximately 40 gallons per capita versus 20 gallons of soft drinks. By

On March 10, 2011, Starbucks and Green Mountain Coffee Roasters (GMCR) announced the formation of a strategic relationship for the manufacturing, marketing, distribution, and sale of Starbucks and Tazotea branded K-Cup portion packs for use in GMCR’s Keurig single- cup brewing system. The new relationship was designed to provide owners of Keurig single-cup brewers with the additional choice of Starbucks-branded super-premium coffees for their brewers. This strategic relationship fur- thered Starbucks’s stated goals of expanding its presence in premium single-cup coffee, making its premium coffees conveniently available to consumers whenever, wherever, and however they wanted it. Howard Schultz, president, CEO, and chairman of Starbucks Corporation stated,

Today’s announcement is a win for Starbucks, a win for GMCR and most importantly a win for consumers who want to enjoy Starbucks coffee with the Keurig Single- Cup Brewing system. Our research shows that more than 80 percent of current Starbucks customers in the U.S. do not yet own a single-cup brewer and our relationship will enable Starbucks customers to enjoy perfectly brewed Starbucks coffee at home, one cup at a time.

Jeff Hansberry, president, Starbucks Global Con- sumer Products Group, added, “We are proud to be the exclusive super-premium licensed coffee brand produced by GMCR for the Keurig Single-Cup Brewing system, and we are looking forward to working with our colleagues at GMCR to further accelerate growth in single-serve coffee.” Lawrence J. Blanford, GMCR president and CEO stated, “This relationship is yet another example of GMCR’s strategy of aligning with the strongest coffee brands to support a range of consumer choice and taste profiles in our innovative Keurig Single-Cup Brewing system.” 1

GMCR appeared on a roll with the Starbucks devel- opment following similar news in February with Dunkin’ Donuts announcing a promotion, manufacturing, and distribution agreement making Dunkin’ Donuts coffee available in single-serve K-Cup portion packs for use with Keurig Brewers. 2 Beginning in the summer of 2011, Dunkin’ Donuts will offer 14-count boxes of Dunkin’ Donuts coffee in single-serve K-Cup portion packs exclu- sively at participating Dunkin’ Donuts restaurants in the United States and Canada. GMCR will exclusively pack- age the new Dunkin’ K-Cup portion packs using coffee

Case 36 Green Mountain Coffee Roasters and Keurig Coffee *

* This case was prepared by doctoral student Keith F. Moody and Professor Alan B. Eisner of Pace University as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Material has been drawn from published sources. Copyright © 2011 Keith F. Moody and Alan B. Eisner.

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Case 36:: Green Mountain Coffee Roasters and Keurig Coffee C297

contained inside the K-cup are embedded within a paper filter. A measured quantity of hot water is forced through the K-Cup, passing through the brew material and the filter into a cup or mug. A brewing temperature of 192 degrees Fahrenheit (89 Celsius) is the default setting, with some models permitting users to reduce the temperature per preference.

“Pod” Brewing Market The Keurig brewer utilizes patented, innovative brewing and single-cup technology to deliver a fresh-brewed cup of coffee, tea, or cocoa at the touch of a button. Brewers with Keurig Brewed technology were the top five selling coffeemakers in the United States on a dollar basis for the period of October through December 2010 and represented 49 percent of total coffeemaker dollar sales for that period according to the NPD Group. At the KeyBanc Capital Mar- kets investor presentation, Larry Blanford reported that Keurig brewer and accessories sales increased 58 percent in the first quarter of 2011 versus first quarter 2010. Dur- ing this same time period, K-Cup portion pack net sales increased 89 percent to $332.9 million. As a percentage of total coffeemaker dollar sales, Keurig’s percentage has increased quarter on quarter every quarter since 2007 (see Exhibits 3–6 ).

While the coffeemaker category sales excluding Keurig declined over 5 percent in 4Q 2010 versus 4Q 2008, sales of the Keurig brewers actually increased over 400 percent during the period, fueling total category dol- lar sales growth in excess of 53 percent for the period. As of year-end 2010, Keurig and Keurig-licensed brewers were approaching the point where sales would account for over 50 percent of total coffeemaker category sales (see Exhibit 7 ).

During the first quarter of 2011, Keurig-branded brewers continued to gain market share in the coffeemaker category. According to NPD, in GMCR’s fiscal first quar- ter, Keurig-branded brewers (without third-party brewers) remained the number one dollar-share leader in the U.S. coffeemaker category, with the four top-selling brewers and over 45 percent dollar share, compared to 36.4 percent

1998, coffee consumption had fallen to 20 gallons per capita annually compared to more than 50 gallons of soft drinks consumed. But consumer preferences can and did change, responding to the availability of higher-quality coffee by drinking more coffee and reversing a three- decade decline. The National Coffee Association con- ducted a survey revealing that 80 percent of Americans drink coffee occasionally and over 50 percent drink cof- fee daily. The U.S. per capita consumption of coffee was estimated to be 424 servings, which included in-home and out-of-home consumption of roast, ground, instant, and ready-to-drink (bottled/canned) coffee. 3 While the average consumption per drinker rose to over three cups per day, 18- to 24-year-olds who drink coffee averaged 4.6 cups per day, whereas those over 60 years old averaged only 2.8 cups per day. 4

The total coffee market in 2010 was estimated to be 105 billion cups or $34 billion (see Exhibit 1 ). 5 Specialty coffee has become a mainstream staple as younger drink- ers have come of age with Starbucks virtually omnipres- ent. Given the proliferation of specialty coffee and a palate less tolerant of Robusta coffee from a can, the Millennial Generation provides a robust outlook for specialty coffee demand (see Exhibit 2 ). The Keurig K-Cup Single-Serve Brewing System Keurig single-serve systems are designed to quickly brew a single cup of coffee, tea, hot chocolate, or other hot bev- erage such as apple cider. The coffee grounds or other brew material are supplied in a prepared, single-serving unit called a “K-Cup.” Once the brewer has warmed up, the Keurig user inserts a K-Cup into the brewer, places a mug under the spout, and invokes the brew feature. Within 20 to 60 seconds, the beverage is brewed. Keurig machines brew by piercing the foil seal on top of the plastic K-Cup with a spray nozzle, while simultaneously piercing the bottom of the K-cup with a discharge nozzle. Grounds

Traditional $17 - $19 B

Specialty $15 − $17 B

Exhibit 1 Total U.S. Coffee Market Value

Exhibit 2 Coffee Preference Percentages by Age Source: National Coffee Association, 2010 Drinking Trends.

30 62 85 55

61 48 43 36

39 52 57 64

18-24 25-39 40-59 60+

Traditional Specialty

%

U.S population (millions)

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C298 Case 36:: Green Mountain Coffee Roasters and Keurig Coffee

Exhibit 3 GMCR Keurig Percentage of Total Coffeemaker Dollar Sales, 2007–2010 Source: NPD Group.

Note: Includes all coffeemakers and espresso makers. NPD data do not include all retailers and are estimated to represent 35 percent to 40 percent of the total marketplace.

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

2.8% 6.7%

3.5% 7.3%

16.9%

4.1% 7.9%

17.3%

26.5%

8.4%

17.8%

36.4%

45.3%

24.8%

14.1%

24.6%

Q1 Q1 Q1 Jan - Mar Apr - Jun Jul - Sep Oct - Dec

Q1 Q2 Q2 Q2 Q2 Q3 Q3 Q3 Q3 Q4 Q4 Q4 Q4

Exhibit 4 Green Mountain Coffee Roasters Income Statement

Period Ending

Sept. 25, 2010 Sept. 26, 2009 Sept. 27, 2008

Total Revenue 1,356,775 786,135 500,277 Cost of Revenue 931,017 540,744 323,372 Gross Profit 425,758 245,391 176,905 Operating Expenses: Research Development — — — Selling General and Administrative 286,986 169,005 134,493 Operating Income or Loss 138,772 93,386 42,412 Income from Continuing Operations: Total Other Income/Expenses, Net (269) 16,338 (235) Earnings before Interest And Taxes 138,503 92,724 42,177 Interest Expense 5,294 4,693 5,705 Income before Tax 133,209 88,031 36,472 Income Tax Expense 53,703 33,592 14,173 Net Income from Continuing Operations 79,506 54,439 22,299 Net Income 79,506 54,439 22,299 Preferred Stock and Other Adjustments — — — Net Income Applicable to Common Shares 79,506 54,439 22,299

Source: Yahoo Finance.

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Case 36:: Green Mountain Coffee Roasters and Keurig Coffee C299

a year ago. For the same fiscal first quarter 2011 period, NPD estimated that, including third-party Keurig-branded brewer sales, Keurig brewers represented 49.3 percent of total coffeemaker dollar sales. In Canada, Keurig brewers

(without third-party brewers) were the second leading dollar-share leader of all coffeemakers, with the brand increasing its dollar share to 14.6 percent in GMCR’s fis- cal first quarter 2011 from 8.1 percent in 2010. On a unit

Exhibit 5 Green Mountain Coffee Roasters Balance Sheet

Period Ending

Sept. 25, 2010 Sept. 26, 2009 Sept. 27, 2008

Assets

Current Assets: Cash and Cash Equivalents 4,756 242,091 965 Short-Term Investments — 50,000 — Net Receivables 204,547 101,710 60,928 Inventory 262,478 132,182 85,311 Other Current Assets 23,488 11,384 4,886 Total Current Assets 495,269 537,367 152,090

Property, Plant, and Equipment 258,923 135,981 97,678 Goodwill 386,416 99,600 73,953 Intangible Assets 220,005 36,478 29,396 Other Assets 9,961 3,979 4,531 Total Assets 1,370,574 813,405 357,648

Liabilities

Current Liabilities: Accounts Payable 214,669 118,156 72,214 Short/Current Long-Term Debt 19,009 5,030 33 Other Current Liabilities 4,377 3,257 673 Total Current Liabilities 238,055 126,443 72,920

Long-Term Debt 335,504 73,013 123,517 Other Liabilities 5,191 — — Deferred Long-Term Liability Charges 92,579 26,599 21,691 Total Liabilities 671,329 226,055 218,128

Stockholders’ Equity

Common Stock 13,282 13,081 2,549 Retained Earnings 213,844 134,338 81,280 Treasury Stock — — (7,336) Capital Surplus 473,749 441,875 63,607 Other Stockholder Equity (1,630) (1,944) (580) Total Stockholder Equity 699,245 587,350 139,520

Net Tangible Assets 92,824 451,272 36,171 Source: Yahoo Finance.

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C300 Case 36:: Green Mountain Coffee Roasters and Keurig Coffee

Specialty Coffee business unit(SCBU) : Sources, produces, and sells more than 200 varieties of coffee, cocoa, teas, and other beverages in K-Cup portion packs and coffee in more traditional packaging, including whole bean and ground coffee selections in bags and ground coffee in fractional packs, for use both at-home (AH) and away- from- home (AFH). In addition, SCBU sells Keurig single-cup brewers and other accessories directly to consumers and to supermarkets. Keurig : Sells AH single-cup brewers and accessories and coffee, tea, cocoa, and other beverages in K-Cup portion packs produced by SCBU and other licensed roasters to retailers by principally processing its sales orders through fulfillment entities for the AH channels. Keurig sells AFH single-cup brewers to distributors for use in offices. Keurig also sells AH brewers, a limited number of AFH brewers and K-Cup portion packs directly to consumers via its website, www.keurig.com.

Net Sales ($ millions) Growth (%)

2010 2009 2008 2010 2009

SCBU 629 383.8 285.9 64 34 Keurig 727.8 402.3 206.6 81 95 Corporate — — — — — Total company 1,356.8 786.1 492.5 73 60

Income before Taxes ($ millions) Growth (%)

2010 2009 2008 2010 2009

SCBU 119.5 53.5 27.8 123 92

Keurig 72.3 40.4 28 79 44 Corporate (44.1) (2.8) (18.7) (1475) 85 Intercompany eliminations (14.5) (3.1) (1.7) (368) (82)

Total company 133.2 88.0 35.4 51 149

Source: GMCR 2010 annual report.

Exhibit 6 Segment Summary

basis, Keurig-branded brewers (without third-party brew- ers) gained ground, increasing share to 6.8 percent in 2011 from 3.2 percent in 2010 for all coffeemakers.

Approximately 18.5 million coffee brewers were sold each year in the United States, and Keurig’s goal was to convert over half of the 90 million American homes with coffee brewers to Keurig. 6 As recently as 2007, research by the NPD Group indicated that the single-serve proposi- tion wasn’t compelling enough for consumers to replace their existing coffeemakers with pod machines. NPD’s research indicated that a significant proportion of purchas- ers were unsatisfied and cited unreliable machines as a problem as well as the coffee itself. The pods available, consumers complained, were pricey, often hard to find, and limited in terms of flavor and blends. In their survey, the NPD Group found some consumers were dissatisfied with the performance of pod machines, with 17 percent of

machines returned, thrown out, or given away. John Block, director for the NPD Group, said, “Manufacturers and retailers have a great opportunity to improve their position in the marketplace by listening to consumer feedback, and integrating all three attributes that customers want most into their product offering: a reliable pod machine, easy- to-find refills, and a variety of coffee flavors.” 7

A Multichannel Strategy for the Away- from-Home (AFH) Market Keurig initially focused on the AFH commercial segment of office users. Increasing demand and brand awareness enabled Keurig to pursue a multichannel strategy, provid- ing widespread exposure to consumer trial. Starbucks and other specialty coffee purveyors laid the groundwork for launching into the AFH office coffee service (OCS) market by educating consumers about gourmet coffee and moving

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Case 36:: Green Mountain Coffee Roasters and Keurig Coffee C301

coffee beyond a commodity. Starbucks may be responsible for a paradigm shift regarding the price elasticity for coffee. The paradigm that applied to price elasticity affecting con- sumer purchases of Robusta coffee by the can shifted with the proliferation of fresh-ground Arabica beans served in a coffeehouse, often for $2 or more per cup. This paradigm shift enabled Keurig to offer a single-cup brewing system into offices, capitalizing on consumer demand to replicate their coffeehouse quality java in the office.

There were approximately 2.6 million coffee brewers in offices nationwide serviced by a network of approximately 1,700 distributors. Of those offices, GMCR estimated that 12 percent had single-cup brewers, and about half of those were Keurig brewers. 8 While Keurig brewers were estimated to be in 30 percent of offices in New England, national pen- etration in the office channel was only about 6 percent.

Keurig continued working with its network of Keurig Authorized Distributors (KADs) to execute office acquisi- tion plans, conduct lead generation, demonstrations, and sampling programs to build Keurig’s office coffee busi- ness. In addition to Keurig’s traditional distributor net- work, customers such as Office Depot and Staples were helping Keurig grow through their business-to-business solutions for both large and small office applications.

Another AFH single-serve opportunity Keurig iden- tified was the hotel market. There were approximately five million coffeemakers in hotel rooms across North America. Keurig believed that 40 percent of these rooms

catered to travelers who would appreciate the benefits of single-serve brewing. The Keurig team went through a rigorous process to develop new brewer concepts for the market. The development of a new “hotel in-room” brewer was one example (see Exhibit 8 ).

Single-Cup Brewer System Competition Consumers had many options of single-cup brewing sys- tems to choose from in North America and internationally. Competition in the single-cup brewing system market was increasing, as relatively low barriers to entry encouraged new competitors to enter the market, particularly with typi- cally lower-cost brewers that brewed coffee packaged in nonpatented pods. Many current and potential competitors had substantially greater financial, marketing, and operat- ing resources versus Keurig. According to Keurig, their primary competitors were Flavia Beverage Systems (man- ufactured by Mars), the Tassimo beverage system (manu- factured and marketed by Kraft), the Senso brewing system (manufactured and marketed by Philips and Sara Lee), and a number of additional single-cup brewing systems and brands. Kraft’s Tassimo system was made primarily for at- home use, while the Mars’s Flavia system targeted offices.

A January 2009 Consumer Reports article on coffee- makers covered pod machines. The article stated, “With pod machines, you simply drop in a sealed packet of cof- fee—no grinding, no scooping, and no mess. But many lock you into the company’s coffee, which tends to be pricey, and the results have been unimpressive.” According to Consumer Reports, “Cuisinart’s Cup-O-Matic SS-1, $200, did best among the pod models tested. It took standard pods or your own grind and lets you pick regular or bold in five cup sizes. It was reasonably quick: about three min- utes for the first cup, one minute thereafter. But the model occasionally leaked extra water into the cup, diluting the coffee.” Consumer Reports also tested the Keurig Breville BKC600XL, $300. Consumer Reports commented that the Keurig machine, “accepts any K-cup as well as loose coffee grounds. It was fairly quiet but that first cup takes almost four minutes.” Consumer Reports recommended, “If you want coffee for one in a hurry and you insist on the neatness and convenience of a pod machine, consider the Cuisinart for its flexibility and speed. Otherwise, we rec- ommend our top-scoring to-go model, the Melitta Take2 ME2TM. It’s quick, brewed superbly, and costs just $25.”

The History of Keurig Named for the Dutch word for excellence, Keurig was launched in 1990 by Peter Dragone and John Sylvan, with the belief that coffee should always be served fresh, whether at home or at the office, just as in a gourmet cof- feehouse. Dragone and Sylvan noticed that people were leaving the office in search of a fresh cup of coffee and asked themselves, “Why do we brew coffee by the pot when we drink it by the cup?” From this question, the rev- olutionary concept of Keurig K-Cup portion pack brew- ing was born. In 1994 Keurig secured a patent and came

Exhibit 7 Total Coffeemaker Dollar Sales, October–December 2008 through October– December 2010 (in millions) Source: NPD Group.

Note: Data include third-party brewers. “Total coffeemaker” category includes all coffeemakers and espresso makers. NPD data do not include all retailers and are estimated to represent 35 percent to 40 percent of the total marketplace.

�19%

�29%

$114.4

$111.1

�3%

�74%

�8%

�144%

$120.8

$111.5

$63.8 $26.1

Oct - Dec 08

Keuring and Keurig-licensed brewers

All Other

Oct - Dec 09 Oct - Dec 10

Total Coffeemaker Dollar Sales in millions Oct. - Dec. 2010 (includes third-party brewers)

$146.9

$175.3

$225.5

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C302 Case 36:: Green Mountain Coffee Roasters and Keurig Coffee

single-cup system: brewers, portion packs, and high-speed packaging lines that manufactured the portion packs. Keu- rig’s integrated approach to new-product development resulted in accelerated new-product launches since 2004. Keurig employed over 30 degreed engineers from var- ied disciplines. The engineering team at Keurig included mechanical, software, and nutritional science, as well as quality assurance and industrial engineering. As of 2007, Keurig held 26 U.S. and 65 international patents covering a range of its portion packs, packaging line, and brewer technology, and Keurig had additional patent applications in process. Of these, 72 were utility patents and 19 were design patents. The Keurig system was based on three fun- damental elements:

1. A patented and proprietary portion-pack system (“K-Cup”) using a specially designed filter, sealed in a low-oxygen environment to ensure freshness (see Exhibit 9 ).

up with a prototype. Two venture capital firms kicked in $1 million and gave Dragone and Sylvan one year to pre- pare a model for mass production. When they missed that deadline, the venture capitalists offered more money but demanded that Nick Lazaris, a veteran executive who once served as chief of staff to West Virginia Governor (now Senator) Jay Rockefeller, be brought on. In 1998, after eight years of development, Keurig released an industrial- strength, single-serve machine that delivered a perfect cup of coffee or tea every time.

Keurig was a technology company in the coffee indus- try. Keurig brewers represented a fusion of technology and design. To maintain and enhance its position as a leader in the gourmet single-cup market, Keurig invested signifi- cant resources and capital in engineering and research and development. This led to a strong and growing portfolio of market-leading, proprietary technology. Keurig’s inte- grated engineering team drove fast and innovative prod- uct development in all three areas that supported Keurig’s

Exhibit 8 Keurig “Hotel In-Room” Brewer

The Keurig team goes through a rigorous process to develop new brewer concepts and bring them to market. Our develop- ment of the B130 hotel in-room brewer is a good example.

The process started with a marketing analysis of industry segments that might benefit from gourmet single-cup brewing. Hotel made sense, as for gourmet coffee in-room, and Keurig’s speed and convenience would be attractive to guests.

Next came meeting with hotel companies to get customer feedback. Keurig placed commercial brewers in several hotels, free of charge, to capture guests’ experiences with the brewer.

Armed with this insight, the Keurig marketing team developed a detailed specfication for an in-room hotel brewer. Key factors were identified, such as brewer size (it needed to be small), and a design to avoid having water remain in the brewer between guests. The Keurig engineering team kicked into high gear to determine new technology needed for a hotel room brewer, than designed an engineering prototype.

Now the fun could begin: product ID work. Keurig takes the look and feel of its brewers very seriously. Several have won design awards. Keurig’s outside product ID firm presented dozens of potential looks for the in-room brewer. Once a design was chosen, it was time to turn the product over to Keurig’s manufacturing partners.

The result? A brewer that has been a major success and is now found in over 40,000 hotel rooms in North America!

THE STEPS TO BRINGING A KEURIG® BREWER TO MARKET

1

2

3

4

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Case 36:: Green Mountain Coffee Roasters and Keurig Coffee C303

Mountain coffee, including blends, flavored, decafs, and estate coffees. Keurig’s K-Cup packaging guaranteed that each cup of coffee was as fresh as “the first cup of every pot.” Keurig’s strategy to gain market share in the office market was to sell machines to distributors and encourage them to give the machines away or lease them for a small fee. The economics of the strategy worked for distribu- tors, because the real profit was in selling K-Cups. If an office went through 30 or 40 K-Cups per day, a distributor recouped the cost of the machine in less than six months of K-Cup sales.

When Keurig launched its first single-cup brewer for the office market in 1998, it partnered with Green Mountain Coffee to manufacture and sell Keurig’s pat- ented K-Cups. Although Green Mountain Coffee was the first roaster to sell its coffee in Keurig’s single-cup brew- ing system, by 2003 GMCR was competing for Keurig’s sales with three other North American roasters: Diedrich Coffee, Timothy’s, and Van Houtte, a vertically integrated roaster and office coffee distributor in Canada and the United States. Since 2003, Keurig had licensed several additional coffee roasters to package gourmet coffee and teas into K-Cups, all of whom paid royalties to Keurig based on the number of K-Cups shipped. For each K-Cup shipped, roasters paid Keurig a royalty of approximately $.04. This unique licensing agreement system enabled Keurig to offer the industry’s widest selection of gour- met branded coffees and teas in a proprietary single-cup format. This wide coffee selection proved to be a key dif- ferentiator for Keurig’s brewing system. Consumers could choose from 11 gourmet brands and over 130 varieties of coffees and teas in K-Cups. Of the more than 2 billion cups

2. Specially designed, proprietary high-speed packag- ing lines that manufactured K-Cups at the coffee roaster’s facilities using fresh roasted and ground coffee (or tea)

3. Brewers that precisely controlled the amount, tem- perature, and pressure of water to provide a con- sistently superior cup of coffee or tea in less than a minute when used with K-Cups.

Keurig’s patented system eliminated the need to measure coffee or water—the two primary culprits for suboptimal java. With the Keurig system, pressurized hot water was filtered through a small plastic pod, called a K-Cup, that combined both filter and coffee (see Exhibit 10 ).

Keurig maintained a sizeable quality control team to assist engineering in establishing quality standards; to communicate standards to all manufacturing partners, roasters, and suppliers; and to audit compliance with Keurig’s established standards. This emphasis on quality products, easy-to-use features, and innovative technolo- gies earned Keurig high marks in customer satisfaction, with 94 percent customer satisfaction from tracked brewer purchasers.

A licensing agreement enabled Green Mountain Cof- fee Roasters to package its high-quality Arabica beans in Keurig’s patented container, the K-Cups. GMCR started distributing the new single-cup Keurig Premium Coffee System to office-coffee-service (OCS) and food-service providers in 1998. GMCR and Keurig sold the system through select distribution channels. The system featured the single-cup Keurig brewer and eight varieties of Green