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The remarkable rise of reverse-engineered private-label coffee pods

The remarkable rise of reverse-engineered private-label coffee pods

By Max Nisen @MaxNisen June 20, 2014

The coffee roaster and single-serve coffee machine maker Keurig Green Mountain has been extremely successful over the last few years, becoming one of America’sdominant coffee brands. But it has been challenged by a rising number of K-Cup pirates—private label companies making much cheaper Keurig-compatible single-serving pods, without paying a dime to Keurig for licenses.

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To be clear, this “piracy” is not illegal, and in fact private labels are by far the fastest growing segment of the single-serve market, dramatically outstripping Keurig’s own brands and high-profile partner companies such as Starbucks. Private-label market share has grown to 9.3% of the total, according to a Credit Suisse research report. And private-label sales growth has been absolutely spectacular over the last year:

That chart makes it pretty clear why Keurig is planning to fight back with its Keurig 2.0 machines, which will have technology that makes it incompatible with unlicensed pods. The company claims that the move is about making a better or more consistent cup of coffee, but its competitors seem to think otherwise. Treehouse Foods, the biggest manufacturer of private-label K-cups, issuing Keurig, arguing that the new machines are anti-competitive.

Still, the K-cup pirates are not too worried about the new efforts to shut private labels out. Treehouse CEO Sam Reed predicts that it’ll be “a matter of months, not years” before the technology is reverse-engineered.

 

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KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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