GMCR's Path to Disruptive Innovation

Green Mountain Coffee Roasters, Inc.’s (GMCR) powerhouse Keurig single cup coffee brewing system was not an overnight success. In fact, throughout its development, little to no consumer research predicted that it would be a consumer hit. But despite all evidence to the contrary, sales for the Keurig system grew more than 50 percent per year from its introduction in 2008 to 2011, and it now sits on kitchen counters in an estimated 12 million U.S. households.

Clearly, this disruptive innovation proved to be the exception to the rule. But why? The answer lies in the entrepreneurial, risk-oriented innovation philosophies of the company behind the brand, GMCR (www.gmcr.com).

“Keurig is not the result of a classic Fortune 500 innovation stage-gate process,” says Kevin Hartley, vice president, Enterprise Strategy and New Business for GMCR. “The innovations were entrepreneur-led, and no mainstream company would have supported them. It was the passion of a small group of individuals who followed the funny sense that visionaries get. That’s the reason it exists today.”


Humble Beginnings

To understand GMCR’s philosophy on innovation, we must travel back 31 years to the small town of Waitsfield, Vt., where Bob Stiller just retired after selling E-Z Wider cigarette rolling paper business for a cool $3.1 million. There, the “retired” entrepreneur found and frequented a small coffee shop named Green Mountain Coffee Roasters, which he later bought and expanded into a manufacturer of roasted coffee. Over time, and with decades of hard work, GMCR blossomed into New England’s premier whole bean and roasted ground bagged bean coffee brand in grocery and convenience stores.

Now, let’s skip ahead 14 years to Massachusetts where three “wild and crazy” entrepreneurs were working together to crack the office coffee pot conundrum; “You know, where the dirty, yucky pot sits in the office all afternoon, and it’s half-baked and half-spilled,” explains Hartley. Their solution was a closed, single cup coffee brewing system that had less-than-thrilling purchase intent scores and was extremely difficult to manufacture. They called their company Keurig, a word derived from the Dutch word for excellence.  

While Keurig was innovative for sure, getting offices to buy the new appliance proved challenging. In short, the founders realized that coffee drinkers are brand sensitive. The key to success was to find and offer a variety of regionally-known coffee brands that catered to each individual’s unique flavor preference. New England’s premier coffee brand, Green Mountain Coffee, was there to become Keurig’s official first licensee, packaging coffee beans in a patented container called the K-Cup pack.

Other license agreements followed with Diedrich Coffee, Tully’s and Van Houtte, to name a few, but GMCR continued to be the leading K-Cup pack roaster. In 1993, GMCR made an early investment in Keurig. In 2006, GMCR acquired the remaining 65 percent of Keurig for $104.3 million. In 2007, under the leadership of Larry Blanford, the company’s new CEO, they plotted their next big move outside of office and into consumer homes.


A Powerful Pairing

GMCR’s acquisition of Keurig united two company cultures that clashed on paper: “One is highly-technical with Type A engineers; the other is coffee-oriented, Vermont-crunchy,” explains Hartley.

Off paper, though, he says they naturally gelled: “It is an interesting culture collision. What the two organizations shared, and still do, is a deep passion to wow and amaze consumers so that their socks actually go up and down when they see our innovations.”

The acquisition also created a holistic business model that differentiated GMCR from its competition.

“In the world of closed coffee systems, we have a true razor/razorblade model wherein we design and build the brewers, and we design, build and package the beverages that go in the brewers,” says Hartley. “The innovations are done hand-in-hand.”

In contrast, others in the coffee and brewer industries might partner with separate appliance manufacturers on the brewer side of the equation, which could possibly lead to disjointed innovation efforts.

With a strong business model and passionate employees in place, GMCR began to embark on a new mission: to become North America’s premiere coffee system. Its aspiration was to build Keurig and Green Mountain Coffee into powerhouse brands on the national stage.

Again, consumer research totally underestimated the eventual success. It indicated that consumers would always favor the drip coffee maker that could brew a cup of coffee for 8 to 10 cents. But entrepreneurial spirit drove GMCR forward. They believed that researchers and consumers misunderstood two things:

• The variety of latent taste desires for premium gourmet coffee within the family unit. “Just because Maude made the same pot of regular coffee for two decades didn’t mean that she actually likes regular coffee. She likes hazelnut decaf, but she had to make Harold happy for 20 years,” explains Hartley. GMCR’s K-Cup packs could fix that. “In under a minute, Harold could have his bold morning coffee experience, and Maude could have her cup of hazelnut decaf.”

• Taste variety desires by individual by day part. “In other words, consumers would prefer to have a big bomber coffee in the morning, then switch to decaf in the afternoon, and then have a cappuccino at night,” says Hartley. The Keurig single cup brewer could easily fix that too.

So around the time of the acquisition, the combined GMCR and Keurig teams decided — after some major strategic work — that the play would be to drive toward North American counter ubiquity, which meant that reliability had to skyrocket, prices had to plummet, and choices needed to proliferate.

“When that all came to together in that weird Zen-like way, it started to explode,” says Hartley.

In 2003, Keurig single cup brewers and patented K-Cup packs hit the consumer market via high-end department stores. In 2008, they became available for sale through grocery stores across the country. According to IRI data for 52 weeks ending October 5, 2008, initial supermarket accounts that carried Green Mountain Coffee K-Cup packs as part of their specialty coffee selection experienced more than twice the growth in dollar sales of the national average for the specialty coffee category.

To continue providing a wide variety of coffees, teas and hot cocoa, GMCR acquired all of Keurig’s licensed roasters over a number of years and also entered into manufacturing and distribution agreements for single-serve packs with Newman’s Own, Caribou Coffee, J.M. Smucker Co. (Folgers and Millstone), Dunkin’ Donuts, Starbucks and Conagra (Swiss Miss).

Momentum hasn’t slowed. Broad consumer adoption of the Keurig single cup brewing system boosted GMCR’s 2011 net sales to $2.7 billion, and the company expects to reach 2012 net sales of $3.8 billion.


Bold Aspirations

To maintain its high growth rate, constant fast-paced innovation is required on the appliance side, the beverage side, and in other growth opportunities beyond the company’s traditional products.

“Our shared aspiration as a company is to transition from North America’s largest coffee and coffee brewer company to one of the world’s premier beverage and beverage maker organizations,” says Hartley. A brewer on every counter and a beverage for every occasion, if you will.

GMCR is moving full force toward that goal using a standardized approach to new product development, which is based on its entrepreneurial roots and does not resemble the processes used at your average Fortune 500 company.

In fact, Hartley works hard to eradicate the word “innovation” from his lexicon all together, instead opting to use the phrase “producing new product hits” and likening the process to producing a hit Hollywood film.

“Our role is to produce, as in the John Lasseter of Pixar kind of produce, monster hit products on the global stage,” he says.

But instead of hiring the best director, costume designer or actor, he’s hiring state-of-the-art scientists, engineers, physicists, researchers and so on, that work together toward clear aspirations. It’s open innovation with a twist wherein he’ll assemble the best possible team, combining world-class employees with state-of-the-art experts — no matter where they are located across the globe — to produce a new product, even if most of the work must be done virtually.

These innovation teams operate with clear protection from the organizational antibodies that typically fight new ideas. This mitigates the problems most organizations experience where executives chip away at an innovative idea until it doesn’t even resemble the initial concept that consumers got excited about. Once GMCR’s innovation team takes it through market and feasibility gates, the product is then gracefully transitioned to one of the existing line organizations to be scaled.

“Every innovation we revere, every great product and brand, was created with misbehaving energy, yet we run most of the global 1,000 with the structure that rewards behaving, not misbehaving,” says Hartley. “If you really want to produce new product hits, then you have to be an effective surrogate — through processes and people — for entrepreneurial spirit, which is the antithesis of a risk-averse, large-scale organization.”

This approach has led to major innovations in 2012 for the Keurig brand:

• Keurig Vue Brewer: Launched in February 2012 and paired with new single cup Vue packs, this new platform maintains the simplicity and convenience of the existing Keurig K-Cup system with added customizable features so consumers have control over the strength, size and temperature of their beverages. As an added bonus, the Vue system represents an incremental step on GMCR’s journey to reduce its environmental impact. The Vue pack’s base cup is made from polypropylene #5 plastic and can be recycled wherever polypropylene #5 plastics are accepted. GMCR has since expanded the Vue brewer line into the commercial market.

• Brew Over Ice Technology: In July 2012, GMCR launched two new innovative Brew Over Ice beverages: The Original Donut Shop Coffee Sweet & Creamy Iced Coffee K-Cup packs, and the first-ever iced fruit brew in a K-Cup pack, Vitamin Burst. Both options offer consumers entirely new ways to enjoy their Keurig brewers, and Vitamin Burst, in particular, catapults GMCR’s beverage options beyond coffee, tea and hot cocoa.

In all, GMCR today sources, produces and sells more than 30 brands and 200 varieties of coffee, cocoa, teas and other beverages in K-Cup and Vue packs.

“Now, you can brew a cup of Hazelnut Decaf, French Roast, Vitamin Burst or a Sweet & Creamy Iced Coffee in less than a total of four minutes on the same machine,” says Hartley. “It is truly amazing.”

The new products brought to market by GMCR have revolutionized the way the people make coffee in North America. One could argue that the visionaries at GMCR are clairvoyant in their ability to produce new product hits despite conflicting research and consumer insights, but Hartley has another take on their success:

“You’re either prescient or you’re not, and I do not believe that we are. If you’re not, then you have to take surrogates for prescience seriously, in terms of processes and people, to create true disruptive innovation.”