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Innovation Economy

An environmental quandary percolates at Green Mountain Coffee Roasters

By Scott Kirsner
Globe Columnist / January 3, 2010

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Most people are familiar with the entrepreneurial success stories that started percolating in Quincy in 1950 and in Seattle in 1971: Dunkin’ Donuts and Starbucks.

But do you know about the one that began brewing in a former watch factory in Waltham in 1992?

Peter Sylvan and John Dragone in the early 1990s started building prototypes of a coffee maker that would brew one cup at a time, using a throwaway package that would hold the grounds and the filter. The result was the Keurig single-cup brewing system, which uses disposable plastic K-Cups that look like supersize creamer containers.

Over the past year, 2.3 million Keurig brewers were shipped. And to keep their owners sufficiently caffeinated, 1.6 billion K-Cups were sold (yes, billion with a “b’’), containing 250 different kinds of coffee, tea, and hot choco late - everything from Newman’s Own extra bold coffee to chai from Celestial Seasonings to hot cocoa by Ghirardelli.

Since 2006, Keurig, now based in Reading, has been part of Green Mountain Coffee Roasters Inc., a publicly traded company in Waterbury, Vt. Keurig’s ultraconvenient coffee machines, which can be found in homes and hotel rooms as well as offices, have become the engine of Green Mountain’s growth, and in fiscal year 2009, for the first time, Keurig generated the majority of its parent company’s revenues: $420 million, growing three times as fast as Green Mountain’s core coffee roasting and distribution business. (The website CrossingWallStreet.com recently put Green Mountain atop its list of top-performing stocks of the past decade, with a 7,895 percent gain in value.)

But while the Keurig purchase will probably prove among the great corporate acquisitions of recent times - Green Mountain paid about $160 million for the company three years ago - it is also creating an interesting quandary for the Green Mountain brand. While the company touts its efforts at social and environmental responsibility, selling many fair trade coffees and teaming with International Paper Co. to distribute the Ecotainer compostable coffee cup, K-Cups are made of totally nonrecyclable plastic and foil.

When the company began selling its single-serve coffee systems to offices, the price was too high to envision a similar product living on kitchen countertops: $795. But by 2004, the company had created a consumer version that sold for $149. (Keurig’s least expensive machine, the B30 Mini, currently sells for $89.)

Keurig president Michelle Stacy looks back to the 2008 holiday season as the moment when the consumer business really took off. “We had the number one, number two, number three, and number five coffee makers in terms of dollars sold,’’ she says.

The timing couldn’t have been better because growth in the company’s office business - much of it focused on car dealerships and real estate offices that offer customers complimentary coffee - was starting to flag.

Before coming to Keurig, Stacy spent nearly 25 years with Gillette (some of it in the razor-and-blades sector, as a vice president of marketing) and Procter & Gamble. She has expanded Keurig’s distribution to retail chains like Target, Bed Bath & Beyond, and Wal-Mart. She has cultivated partnerships with brands like Cuisinart and Mr. Coffee, that will plaster their own brands on Keurig machines, which will gobble up even more K-Cups, and be sold in high-end shops like Williams-Sonoma.

“Today, between 5 and 6 percent of households use a single-serve coffee maker,’’ Stacy says. “We think the growth potential is for greater than 15 percent.’’

Among Keurig’s competitors are Tassimo, owned by Kraft Foods Inc., and Senseo from Royal Philips Electronics NV, but Keurig holds a dominant share of the US market, according to market researchers.

The simplicity and speed of Keurig brewers are appealing: You pop a K-Cup into the machine, get a fresh cup of coffee in 30 seconds, and then toss out the K-Cup.

Every time the company sells a K-Cup, it rakes in about 16 cents of profit, according to analyst Mitch Janheiro of Janney Capital Markets. When other coffee roasters produce their own K-Cups to be used with Keurig brewers, they pay a 6 cent royalty to Keurig. (The consumer pays about 55 cents per cup of coffee.)

Stacy says that while Keurig hasn’t been hearing complaints from very many consumers about the nonrecyclable K-Cups, finding a more environmentally friendly alternative “is a huge part of our research and development.’’ (Keurig does offer consumers a reusable filter accessory that can be filled with coffee grounds when each cup is made, but the company’s financial success relies on sales of K-Cups.) Online, bloggers have remarked on the irony of fair trade and organic coffees being packaged in nonrecyclable plastic.

And visitors to Green Mountain’s website have posted questions like, “Has there been any progress on this? My company is seriously considering K-Cups, but the recycling issue has been brought up a few times.’’

Keurig concluded the first phase of a “life-cycle analysis’’ of the K-Cups this summer, looking at the energy and environmental issues surrounding each stage of their production. But finding new materials to replace the current polyethylene and polystyrene used in the cups is proving a challenge: Any replacement material needs to withstand the heat of 186-degree water, keep air and moisture from making the coffee go stale, and be easy for the brewing device to puncture without shattering.

And even if Keurig can come up with a recyclable cup, there are two further questions: will consumers be willing to remove the foil cap and the paper filter inside before tossing the cup in the recycling bin, and will city recycling programs reject the cup (some won’t handle objects smaller than 2 inches)?

The company plans to start testing paper K-Cups this year, but only as packaging for teas, which don’t lose their flavor as quickly as coffee does when exposed to air.

It’s interesting that companies like Gillette, which don’t make sustainability a prominent part of their corporate mission, don’t get the same scrutiny as those that do.

But at Green Mountain’s website, corporate social responsibility is highlighted on the homepage, where the company says: “For over 25 years, we have been on a deliberate journey to create and sustain a values-driven company that views profit as a means to achieve a higher purpose.’’

That higher purpose combined with Keurig’s blistering growth - analysts expect it to sell more than 3 billion K-Cups this year and 5 billion in 2011 - creates what seems like an increasingly urgent environmental dilemma for Green Mountain.

Scott Kirsner can be reached at kirsner@pobox.com.