Keurig released its 2.0 model in August, with a feature that initially prevented consumers from using other brands of coffee pods.
“We cracked the code,” a smiling John Pigott, CEO of Club Coffee, told CBC News. The Toronto company made news this week with its $600-million lawsuit against Vermont-based Keurig, which alleges anti-competitive behaviour.
“And we’ve pointed other companies in the right direction on how to do it,” he added.
Some consumers had expressed anger and even launched lawsuits over Keurig’s plan to ensure that only its licensed K-cups would work in the new model. Less expensive off-licence coffee pods have been available for two years, but would be locked out from the wildly popular 2.0 model.
Now a number of companies say their pods will function in the 2.0 model.
Give us our fix
Canadians’ growing love of single-serve coffee makers has spawned huge growth in the business, and an all-out battle between companies that sell the pods.
“The single-serve coffee market in Canada is really exploding over the last number of years,” says Robert Carter of market research firm NPD Group.
“Right now four in 10 Canadians say that they have a single-serve device in their home. The more convenient we make something, the more consumers respond. Three million of the devices were sold over the last three years.”
But the real money is in the coffee pods. Just as they do with ink cartridges for printers, and refill blades for razors, companies cash in on the steady sales of a component that needs constant replenishing.
Of Keurig’s $4.35-billion net sales in 2013, K-Cup sales reportedly accounted for $3.1 billion. But the patent expired two years ago, and competitors poured in.
Coffee pods have become hugely important to Club Coffee. The 100-year-old company is the largest roaster and distributor of grocery store coffee in Canada. It also works with the food service industry. Since it got into the pod business two years ago, the company’s revenues have doubled. For competitive reasons, Pigott won’t say exactly how many pods he’s producing, but acknowledges it’s “several million” of them daily.
“The consumer likes what we’re doing,” he says. “But I don’t think it’s been that popular with my competitor.”
Cracking the code
When Keurig’s CEO announced last fall that its next model would feature digital rights management that would render unlicensed pods useless, Pigott took note. He obtained a Keurig 2.0 model even before it was on store shelves and assembled a small team to examine the device and its K-cups to understand the technology.
“We figured it out in an afternoon,” he crows, noting that it took another two months for Club Coffee to develop its own workaround.
So what’s the secret? It turns out the new lids on K-cups are printed with ultraviolet ink. The darkness inside the coffee maker allows a light diode to read the ink and start the brewing process. Pigott consulted the printer that manufactures polymer bills for the Bank of Canada and was able to discover the precise formula that would activate the coffee maker. He bought commercially available ink and bingo — his pods worked.
Can Keurig stay on top?
Neil Madden owns ECS Coffee, a retailer of single-serve coffee pods of all types, K-Cups and unlicensed knockoffs included. Madden believes Keurig makes a good product that a lot of people want, but wonders if the company brought the same rigour to its lock-out system.
“I’ve been told you can trick it with a highlighter from Grand and Toy,” he says.
Pigott spread the word that he’d cracked the code to let other manufacturers know about the workaround. “It helps if there are a few of us doing this,” he explains.
Mother Parkers announced in August that it would be selling unlicensed pods that are compatible with the Keurig 2.0, as will Treehouse Foods of Illinois. Pigott says Club Coffee’s pods will be first to hit store shelves.
Does he fear Keurig will take legal action? “Frequencies of light are not patented,” says Pigott. “We’re very confident. We did a lot of this with the legal in the back of our minds. I’m not looking for trouble.”
In an email, Keurig’s vice-president of corporate communications maintains that knockoff pods won’t be a threat.
“We remain confident that only Keurig-designed and produced and/or licensed beverage-optimized packs with the Keurig Brewed seal will allow the Keurig 2.0 brewer to perform consistently at its optimum level, delivering the quality beverage experience Keurig consumers demand,” writes Suzanne DeLong.
Consumers will find out fast enough what works and what doesn’t.
Meantime, Keurig has surely taken note of what happened to Nespresso in France. The government launched a probe into anti-competitive behaviour, and in April Nespresso agreed to stop trying to prevent rivals from making knockoff pods for its machines.