Perking Up the Coffee Market: The Club Coffee Recipe for Meeting Consumer Needs
John Pigott to the Economic Club of Canada Ottawa - November 13, 2014
" $ 600 million. That’s a lot of money."
It got a lot of attention when my company, Club Coffee, filed a lawsuit against Keurig Green Mountain last month. But the money is not what’s grabbing the attention now. It is about what our fight means for consumers. It is about Keurig’s strategy to grab a virtual monopoly over your morning cup of single- serve coffee – and how a bunch of small Canadian companies are standing up for consumers.
Since this story hit the news, I have been amazed at how much people are picking up on our call to Free The Bean. I have been amazed at the number of people who stop me to talk about our fight to give consumers more innovation and better prices. The emails. The phone calls. All from people cheering us on – cheering on the idea of real competition.
Some are people I’ve known through business for years and others are regular consumers. Just last week, Tony, the purser on my Air Canada flight stopped me to ask about the case.
People get it. People get that our fight is their fight too. It is a fight for the principles of consumer choice and fair competition. And it is really catching on. Just as with all those other products where we have little or no choice in supplies, consumers are telling the government to stop a big company from using a tricky way to pull money from our wallets.
Today, let’s talk about that fight. Let’s talk about what our Free The Bean campaign means to you – and consumers across Canada. Let’s talk about how you can Free The Bean too.
This is a great day to talk about all this. Why? Because there has been an important step forward in our campaign to Free The Bean.
I am pleased to announce that Club Coffee has filed a complaint with the Competition Bureau. The complaint is clear. We want the Bureau to investigate Keurig’s actions. We want the Bureau to investigate a strategy to force a monopoly in K-cup format single-serve coffee.
We believe strongly that when the Competition Bureau does that, they will see illegal tactics with direct and negative impacts on Canadian consumers and businesses. They will see a strategy designed to keep prices higher than they would be in the open market that Canadians have enjoyed for the past two years. They will see a strategy that will squeeze out consumer-friendly innovations. They will see a strategy that will affect more than just Club. It will affect Canada’s smaller coffee producers such as my colleagues at the head table.
Up here with me today are the CEOs of just two of the innovative companies across Canada and the US that we work with. Darren Footz is president of Granville Island Coffee in Vancouver. Jeff LeDrew is president of Jumping Bean Coffee in St. John’s.
Club has worked with both companies to help them bring their unique coffees to more consumers. In fact, both have some of their coffee here today for you to take home and enjoy. And just like Club Coffee, Jumping Bean and Granville Island want to Free The Bean.
Club Coffee’s Roots
Now, not only does this Competition Bureau filing mean this is a great day for this speech, I couldn’t ask for a better audience. As you may know, I come from a family with deep roots in this community and in business.
My grandfather, Cecil Morrison and his business partner, Dick Lamothe, started a bakery in Ottawa in the depths of the Depression. Today, I am the third generation President of Morrison Lamothe Incorporated. Under the leadership of my grandfather – and then my mother, Jean Pigott – and then my aunt, Grete Hale who is here today, Morrison Lamothe has continually reinvented itself to meet consumer needs.
But one thing has never changed. Our values. As my grandfather put it.
"The fundamentals of business management are not much different today than they were 50 years ago. Success depends on vision, on meticulous attention to detail and on how well you look after your employees and customers."
Those values help us to build strong relationships with other businesses. Those values help us to make business deals on a handshake. Why? Because people trust us. They know the kind of people we are.
The Club Coffee Story. In fact, that is how Morrison Lamothe and Club Coffee came together.
Club Coffee was founded in 1906. Today, Club is the largest roaster, contract manufacturer and distributor of packaged coffees that Canadians buy from grocery stores. You may not see the Club brand because we work behind the scenes. Club supplies some of Canada’s largest coffee retailers and food service customers, including our hosts here at Fairmont Hotels.
In 2006, Club Coffee was owned by Nestlé. When that company decided to move out of coffee roasting and grinding in Canada it asked me if we would be interested in the business. Why? Because they had done a lot of business with Morrison Lamothe. They saw a natural fit. Very similar places in their markets. Very similar values inside their operations and with their customers.
When we took it over, we immediately looked for ways to reach more consumers. Soon we saw a path that would revolutionize our business completely. Single-serve coffee.
Single Serve Opportunity
How many of you had a single-serve brewer at home 10 years ago? Almost nobody. How many of you have one at home or in your workplace right now? Most of you.
The coffee sales data tells the story. In the year prior to May 2012, Canadians bought $204 million worth of single serve coffee. By 2013, it was $367 million. And by this last year? Almost half a billion dollars in coffee sales and still growing.
Club Coffee jumped into that market with both feet. We found a different way to deliver our single serve product than the plastic packs that Keurig uses. And you can see those on your tables. We went after customers that Keurig was ignoring. We found ways to deliver products at very competitive prices.
Now, what happens when you give consumers the innovation, choice and prices they want? They buy.
We added production lines. We added employees in jobs that pay well and offer profit sharing. We worked with government partners to grow even more. And we keep looking for new ways to give consumers what they want.
We know that many consumers are concerned about the environmental impacts of single serve coffee. We get that. It has been estimated that you could circle the Earth 11 times with the K-Cup packs that will be sold just this year. We are answering that consumer concern. Club Coffee is just weeks away from rolling out the world’s first fully certified compostable pod designed to meet municipal organic waste standards.
We know that consumers want to choose from a wide range of blends of coffee, tea and other hot beverages such as hot chocolate and lattes. Working with companies such as Granville Island Coffee and Jumping Bean Coffee gives consumers more choice.
With Club Coffee and other companies delivering innovation, choice and competitive prices, Keurig was faced with a challenge. Most of its key patents were expiring by 2012. For years, there was the illusion of competition. Despite the dozens of K-cup brands you see on a grocery shelf under all kinds of brand names, at least 80% of those are actually produced under a Keurig license or directly by Keurig. That’s not real competition.
But when real competition did arrive, it meant financial pressure on Keurig. How much pressure? Let’s do some math. The average price per pod for Club-supplied brands over the last year? 52 cents. The average price per pack of Keurig K-cup brands over that same time? 73 cents. That’s 40% more that each Keurig consumer was paying – cup after cup after cup. You could call that 40% extra price a kind of K-tax on each and every Keurig-made or Keurig-licensed K-cup.
Maybe they could charge those prices when their patents gave them a legal monopoly. But when there’s real competition in an open market, consumers get to choose. They can say no to the K-tax. And they did say “no.” Keurig’s market share was sliding, while Club’s sales were exploding, thanks to a kind of K- tax revolt.
So how is Keurig responding? By trying to rebuild the monopoly they lost. Keurig says technology in its new brewers stops consumers from using coffee, tea and hot beverages from Club and other competitors. Keurig is telling brands and retailers that technology means they must sign exclusive agreements that kill consumer choice.
David Fights Back
When we heard what Keurig was telling the coffee world, we got to work. We consulted with experts, including some here in Ottawa. Guess what? Keurig’s so-called technology hasn’t been leading-edge since the days of disco. It’s pretty easy to get around.
We talked to our friends at Jumping Bean and Granville Island, to see what the impacts will be for Canada’s small coffee companies. Jeff and Darren here see what we see too. They see limits on consumer choice, especially for anyone who wants an environmentally-responsible alternative. They see handcuffs on the ability to expand and create jobs in Canada, since there’s nothing to stop a monopolist from moving everything to the US. They see pricing controls that will impact commodity markets, including for fair trade and socially-responsible products. Keurig already has strict agreements that prevent competition to supply the office coffee service machines in many Canadian workplaces. Now, the new brewer means these small companies face even higher barriers – and the people who buy office coffee are faced with the K-tax again.
So, that’s what they see. But what does Wall Street see? The stock analysts keep applauding a monopoly that will keep prices high on Main Street. The market capitalization of Keurig has risen to about $25 billion US while it has gone after its strategy. Stock analysts attribute much of that rise to the monopoly strategy. And you know who’s going to pay the price – Canadian consumers at their breakfast tables every day.
In a free market economy, that is just wrong. So, we decided to fight back and Free The Bean.
We are not alone in this fight. As Canadians, we have the law on our side. In our country, a company cannot use its historical dominance to suppress legitimate competition. They have to play within rules that are designed to benefit consumers. Free The Bean says it’s time for Keurig to play by Canada’s rules, not Wall Street’s.
What is Free The Bean? You have heard about one part of it already – our lawsuit. We want Ontario’s courts to find that Keurig has broken a range of consumer protection and competition laws. And at the start of my remarks, you heard about a second part – our Competition Bureau filing. We want the Bureau to investigate this monopoly strategy and do what the law allows it to do to benefit Canadian consumers. We believe in our case for competition. More important, Canadians believe in our case. The third element of Free The Bean demonstrates that belief.
We now have a Free The Bean social media campaign. When you visit the FreeTheBean.ca website, you see a brief description of what Keurig is up to and what it means to Canadians. The website invites Canadians to contact the federal Minister of Industry, the Honourable James Moore, and John Pecman, the Commissioner of the Competition Bureau. In just 20 seconds, every one of you can send messages to both men, asking for an investigation. More than a thousand messages have already gone out from consumers. People are using the Free The Bean hashtag on Twitter and liking the page on Facebook.
I know that many of you have already sent your messages and I want the rest of you to join the campaign too. I want you to share the news with friends, family and colleagues to expand our reach. When you do, you will be part of a campaign that is taking off for simple reasons. Canadians see that Keurig is trying to please investors at the obvious expense of everyday coffee consumers. Canadians know we deserve an open market with real choice. We deserve innovation. And as Canadians, we have laws that can follow through with action.
To build that momentum even further, we are launching an ad campaign that will bring the Free The Bean message to even more Canadians. We want Canadians and federal officials to stand together for real competition in a free marketplace.
As my Chief Financial Officer will tell you, it can be expensive to stand up for consumers and for the principles that have made Morrison Lamothe and Club Coffee successful. But we are. We are because my family’s business has faced challenges many times before – and we overcame them. We focused on doing the right thing by our consumers, suppliers and partners. And we still are.
The difference today is that we have a competitor with deep pockets who doesn’t really want to compete for business for anymore. Their 40 percent K-tax is more important than your right to choose. That may go over with Wall Street analysts but Main Street consumers are saying no to the K-tax and yes to real competition.
They’re saying Free The Bean.
And they have an effective competition system that values consumer protection to stand up for them. I believe our government and its officials understand what is at stake for Canadians as they make their morning cup of coffee. The government is addressing consumer pocketbook issues such as roaming fees and paper telecom bills. We believe the same can happen here too.
So is this a David and Goliath story? Sure. But we all know how that one ended.
Thank you and “Free The Bean!”
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