“We underestimated the passion that consumers had for” the My K-Cup, which allows them to brew coffee from a bag in the pod-based brewers that perhaps are not licensed in the pod format, President and CEO Brian Kelley said May 6 during the firm’s second quarter earnings call.
He emphasized that the My K-Cup users are a small portion of users, but that the reusable pod is “an important piece of the ethos to be able to brew any coffee brand you want,” which is why the firm is bringing it back.
Keurig originally took the reusable pod away because it was not compatible with the digital rights management technology that the firm incorporated into its new brewers to block the use of unlicensed K-cups and force consumers to buy only company approved pods.
While the change had a strong business justification, it created a negative backlash by consumers who wanted the flexibility to brew any cup of coffee – including from a bag.
While the return to the My K-Cup appears to be an approved hack to undo the company’s efforts at controlling the competition, Kelley assured investment analysts that bringing back the My K-Cup would not affect sales of pods from licensed partners.
Sales of brewers, accessories down
Installing the DMR technology also negatively impacted sales of brewers and accessories, which were down 23% in the quarter, because consumers were confused about which pods were compatible with the new brewers.
A “key piece” to sluggish sales of the Keurig 2.0 launch with the DMR technology is “we did not communicate as effectively as we could have the variety that is in the machine, and there were many consumers who that that it only brewed Green Mountain brand or Keurig-owned brands,” acknowledged Christie Bonner, senior director of investor relations.
“We didn’t get the message out effectively,” quickly or broadly enough to dispel that rumor and consumer confusion, she added.
But beginning in June brewer 2.0 packaging will more prominently communicate that it is compatible with more than 500 varieties across more than 70 brands, including the top 10 brands, Kelley said.
Less expensive machines coming
Sales of new brewers also were slow because the firm did not have sufficient inventory of machines in the lowest entry point price range, executives said.
The firm always planned to launch a smaller, less expensive version of its new machines – the K200 – in the back half of this year, but it did not anticipate not having for sale in the front half of the year the lower costing Mini Plus Brewing System.
In late December, Keurig recalled about 6 million Minis in the U.S. and more than 500,000 in Canada due to overheating and burn risks.
The lack of a less expensive model kept many potential newcomers to the brand from buying brewers and the related accessories.
Additional enhancements, products coming
The company also will roll out several other enhancements and new products to help sales rebound.
For the holiday season, the firm will offer more brewer sizes, additional temperature control capacity and an easier hot water dispenser.
“We expect these actions, along with incremental promotional programs with our retail parnters to bring our brew inventory down to more typical levels over the next several quarters,” Bonner said.
The firm also will focus on “reinvigorating innovation across our own brands,” including launching two new varieties of Green Mountain Donut and the launch of Green Mountain organic, Green Mountain reserve and Laughing Man, which will ship in June and July, Bonner said. She also noted new varieties fo the K-Carafe and K-Mug will launch soon.
Revised guidance
These innovations will take several quarters to gain traction, prompting the firm to revise its guidance “to better reflect the brewer sell through and their associated impact on the installed bases,” Bronner said.
The firm now expects sales growth for 2015 to reach low-single digits at most compared to 2014, and earnings per share to decline in the mid-single digits.
Overall, revenue for the quarter was up 2% compared to a year ago, driven by a 14% pod volume increase that was offset by lower brewers and accessory sales, the firm reported.