Serves Up, One Caffeine Wave at a Time

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\"RRFor big box retailers in the home business, there is no single merchandising classification they love to hate more than small electrics.

A cornerstone of the housewares business, it is – along with cookware — the workhorse of the promotional calendar, driving traffic and generally getting bodies to come into the store to the home department. It is also a train wreck when it comes to profitability. I remember talking with a new divisional merchandise manager for housewares who was downright flabbergasted by the tiny margins in the store’s small electrics business. If it weren’t for bad margins, small electrics wouldn’t have any margins at all. That said, you’re unlikely to see any of the major players in housewares retailing getting out of the category anytime soon. Like the old Woody Allen joke about the guy who thought he was a chicken, retailers need the eggs.

Big Boxes, Big Sales

Which is why any major new product introduction in the category is so important for big box stores. You see, the vast majority of the sales in small electrics products like blenders, toasters, coffee makers and just about anything with a plug you use in a kitchen are made in just a handful of retailers: Walmart, Target, Bed Bath & Beyond, Kmart, Macy’s and to a slightly lesser extent Kohl’s, Costco, Sears and Penney.

So, when a big product comes along, these stores get all hot and bothered. Especially coming into the critical holiday fourth quarter when a hot housewares product becomes the choice for the utterly clueless and/or careless gift giver and can end up saving the day for a retailer that guessed wrong on its fashion assortments.

There are countless retail legends about the season being saved by a Salad Shooter, Fry Baby or similar item that was must-have in December and can’t-find by the following March. And certainly, big box stores still nostalgically recall the heyday of the single greatest selling small electrics product of all time: The George Forman Lean Mean Grilling Machine. Perhaps the least likely product ever – it was a cooking device that had been around for years with limited success and it was named for an ex-boxer with a reputation as one of the most sadistic punchers in the sport – the Foreman Grill had an unprecedented run as the best selling small electrics product ever.

How Do You Take Your Coffee?

Retailers would kill for another Foreman Grill. They are hoping Keurig 2.0 is it. Keurig, as anyone who wakes up in the morning and needs caffeine badly – and fast – knows is the leading brand in the single-serve coffee category. After a somewhat rough start for this product classification in the American market in the early 2000s, single-serve machines have come to be a major piece of what the trade simply calls “coffee.”

The fact that Keurig has become the standard-bearer in the category could never have been predicted. When the single-serve machines were first introduced, after establishing themselves in the European market over the previous several years, just about every major coffee maker supplier introduced its own machine, based on their own proprietary systems.

And virtually every one of them failed.

People who spend their lives pondering such things have several theories about why that happened, but the prevailing wisdom is a pretty basic one: the coffee from these devices simply wasn’t very good.

When Keurig came along, right after the first wave of machines, they were a relatively obscure supplier with limited distribution and virtually no name brand recognition in a category where big brands like Mr. Coffee, Cuisinart, Hamilton Beach and Sunbeam were literally household names. Yet, Keurig outlasted them all – the coffee was pretty good — and became the de facto machine. Green Mountain Coffee, which had previously been just in the coffee and bean business, liked Keurig enough to buy it and even rename its company for the machine. K-Cups are the ubiquitous first thing many Americans reach for in the morning.

A few years ago Keurig tried to address the one limitation that single-serve machines – by definition – have: they only make a single serving. It introduced the Vue machine, a stand-alone device that made larger servings. The Vue, which sounded more like a TV talk show than a coffee machine, never really caught on. It was expensive, it didn’t have the endless choice of flavors and blends the single-serve machines offer and, no doubt, it faced far more competition.

Another Cup of Coffee

So, earlier this summer, Keurig introduced the 2.0, which has the ability to make both single and multiple serve portions. The machine is available online now and while it isn’t in stores yet, it no doubt will be there soon. It’s a bold move for Keurig, whose new CEO, Brian Kelly, is charged with growing the company at a time when its patents on the K-Cup design will soon expire. The company figures it is in about 18 million households now, and since there are 90 million coffee-drinking households out there, there is huge upside potential for the other 80% of the java lovers.

As large as the stakes are for Keurig, they are just as high for retailers. Obviously, as a big seller, the Keurig brand is necessary to drive store traffic, especially at holiday. Pod-style machines are also one of the few razor blade- model businesses stores have in their housewares departments. Shoppers buy the initial machine and then they have to keep coming back to buy the pods, driving even more traffic into the store. Even with the pods available online, in supermarkets and probably at car washes these days, some portion of their overall sales do take place in big box stores.

Keurig has also entered into a partnership with Coke to introduce a cold-beverage, pod-technology machine, due to debut next year. It would seemingly complete with Soda Stream and other machines already in the space. But coffee is where the money is, which is why Keurig 2.0 is so important. That’s why retailers are asking the big question: Will it be a high-octane, full-speed ahead seller…or will it just amount to a hill of beans?

Warren Shoulberg is editorial director for several Progressive Business Media publications for the home furnishings business. He prefers espresso in the morning.



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