May 28, 2014
By Marc Gunther
From a startup with sustainable credentials to a global coffee brewer that is shunning the environment for consumer convenience, Keurig Green Mountain has lost its way.
Not long ago, Green Mountain Coffee and its chief executive, Bob Stiller, were hailed as corporate-responsibility pioneers. Green Mountain was the world’s largest buyer of Fair Trade coffee. The company offset the carbon emissions of its energy use and won a “green power” award from EPA. Twice, it topped CR Magazine’s list of the 100 best corporate citizens.
Today, Keurig Green Mountain (KGM), as it is now known, remains a corporate-responsibility standout. But the Vermont-based firm has a dark stain on its reputation. Since acquiring Keurig, the inventor of a single-serve coffee machine and its patented K-Cups, the company has become the driving force behind what critics say is an environmental scourge – the throwaway coffee pods made of plastic and aluminum foil that waste energy and materials, and are all but impossible to recycle.
Meanwhile, Stiller, an ex-hippie who briefly became a billionaire, was forced out of KGM after going on a spending spree with borrowed money, acquiring a 164-foot yacht, a $10m, 7,500-square-foot Palm Beach mansion and a $17.5m Manhattan condo formerly owned by New England Patriots quarterback Tom Brady. Green living, that’s not.
What went wrong with Green Mountain? In a word, success. Its story challenges easy pieties about doing well by doing good. This is a company that has done very well – but only by setting aside, at least for now, the environmental values it once held dear.
Green Mountain shareholders certainly aren’t complaining. Shares of Keurig Green Mountain (NASDAQ:GMCR) have grown 50% in the last year and 548% in five years. Sales have skyrocketed to $4.4bn last year from $492n in 2008. Those Keurig machines and the little plastic cylinders that pop into them have driven that growth, accounting for more than 90% of revenues.
Keurig Brewing Systems are now used in 16m US homes, about one in six, the company estimates. In 2013, KGM says it sold roughly 8.3bn “portion packs”.
We have a lot of work to do
To be fair, Keurig Green Mountain recognizes that the waste created by its coffee pods is a problem and promises to reduce it. Monique Oxender, the company’s senior director of corporate responsibility, told me: “Recycling is one of those areas where we have a lot of work to do, and we know that.”
In its latest sustainability report, Keurig Green Mountain set a 2020 target of making 100% of K-Cup packs recyclable. That won’t be easy, and manufacturing a recyclable package doesn’t, of course, mean that it will be recycled.
Still, KGM executives say the coffee pod waste needs to be put in context. They argue that single-serve machines save resources in the coffee-growing supply chain because they waste less coffee than traditional brewing methods. (Think of how much coffee is thrown away in offices and homes, and how much embedded carbon and water that coffee contains.) The company has commissioned a life-cycle analysis of the K-Cups, to better understand their impact.
But Brian Kelly, Keurig Green Mountain’s CEO, isn’t waiting around for the findings as he looks for opportunities to sustain the company’s explosive growth. In February, Coca-Cola bought a 10% stake in Keurig Green Mountain for $1.25bn as part of a deal to obtain distribution of Coca-Cola products on Keurig’s planned single-serve cold drinks machines. (Kelley is a former Coke exec.) This month, Coca-Cola bought another 6% of the company, making it KGM’s biggest shareholder. And KGM and Campbell Soup have formed an alliance to find ways to sell single servings of soup in plastic pods.
In Keurig Green Mountain’s latest annual report, Kelly writes: “Our mission is to have a Keurig® System on every counter and a beverage for every occasion.”
So long as those Keurig systems pile up waste, that’s irresponsible, critics say.
“We now understand waste, water usage, manufacturing, mining, freight transport and packaging and their effects on the world,” says Amy Larkin, an author (and Guardian Sustainable Business contributor), consultant and former Greenpeace executive. “It seems madness to develop a new product line that increases all of the above.”
The journey behind the brand
Headquartered in Waterbury, Vermont, the small town where Ben & Jerry’s is based, Green Mountain began its life as a single Vermont cafe in nearby Waitsfield. The oft-told story is that Bob Stiller stopped by for a cup of joe in 1981 and liked it so much that he bought the place. He was prescient: Long before the boom in the specialty-coffee industry that made Starbucks a household name, Stiller saw that there was money to be made in selling high-quality coffee.
Green Mountain was Stiller’s second startup. Previously, he and a friend co-founded E-Z Wider, a rolling paper company, that they later sold for $6.2m. “I used the product. But I don’t think we were obsessive dopers,” Stiller once said. Stiller was clearly shaped by counterculture, studying with Deepak Chopra, practicing meditation, embracing environmentalism and adopting a business decision-making process called “appreciative inquiry”, a business discipline that focuses on positive change. David Finney, the president of Champlain College in Burlington, Vermont, where the business school is named after Stiller, has described him as “a very spiritual guy”.
Green Mountain grew slowly at first. It opened stores in New England (that were later shut), sold coffee by mail and expanded its organic offerings. It struck distribution deals with Mobil Oil gas stations and McDonald’s in New England, and partnered with Newman’s Own, another corporate-responsibility leader.
Early on, the company became an important backer of Fair Trade, according to Paul Rice, president and CEO of Fair Trade USA. He credits Stiller with taking a “leap of faith” by embracing the Fair Trade model, which guarantees higher prices for coffee growers and delivers social benefits to coffee-growing communities. “No one was sure that consumers would pay a few pennies more for a cup of coffee that would make a difference,” Rice told me.
Since 2010, Green Mountain has been the largest purchaser of Fair Trade coffee in the world, buying more than much-bigger companies such as Starbucks and Walmart. “That’s a pretty remarkable distinction,” Rice says. Cumulatively, KGM’s purchases have generated $30m in community development benefits for farmers.
Stiller again sensed opportunity when it came to Keurig. In 1998, Green Mountain invested in Keurig, which was then a struggling, little-known startup targeting the office market. It later acquired more shares and bought all of Keurig in 2006, just in time to spark what the company now calls “a powerful revolution in how consumers prepare and enjoy beverages at home”. The 2006 deal valued Keurig at about $160m. KGM’s market capitalization now tops $18bn.
By 2010, Green Mountain’s rapid growth had attracted speculative investors, vocal short-sellers, shareholder lawsuits and controversy about its accounting practices. It also set the stage for Stiller’s ouster.
Rise and fall from green grace
Stiller had become a billionaire in 2011 (when Forbes estimated his net worth at $1.3bn), but his wealth was tied up in company stock. To fund purchases that included the mega-yacht, homes and land in New York and Florida, not to mention a small Vermont air charter company, he borrowed money against his stake in Green Mountain. When the company came under attack from hedge fund manager David Einhorn and other short sellers, the stock price tumbled and Stiller was required by his lender, Deutsche Bank, to sell 5m shares.
The stock sale fell outside of an approved transaction window for insider sales, and he was forced out as chairman of the board in 2012 as a result. “I am really shocked and hurt,” Stiller told CNBC at the time. About his lifestyle, Stiller said: “I’ve worked all my life building this company and it’s been successful. I want to enjoy it. Whether it’s living lavishly, I think that’s all relative.”
It’s hard to know whether Stiller’s taste for luxury or his departure from Green Mountain affected the company’s values and culture, or whether, as seems more likely, the merger with Keurig set the company onto a course where its success depends on disposable plastic pods that pollute the environment. Those pods are expensive as well as wasteful: The New York Times estimated that consumers pay more than $50 per pound for coffee that comes in single-brew packages, even for pedestrian brands such as Folgers. Starbucks with its Verismo system and Nestle with its Nespresso machines have also embraced the single-serve business; it would seem that any coffee maker that ignores the disposable trend does so at its own risk.
KGM executives point out that disposal of the coffee pods represents only a fraction of the company’s environmental impact. Growing and roasting coffee, manufacturing machines and pods and shipping all have a larger impact.
“We are trying to make sure that we are focused on the things that matter most,” says Suzanne DuLong, a vice president at KGM. But the company acknowledges that at least some of their consumers care about the waste issue.
The complex challenge of convenience
Solving it will be devilishly hard. KGM’s best-selling K-Cups are made of No 7 plastic, a blend which can’t be recycled in most places. They have an aluminum lid, which is hard to separate from the cup and, of course, they are filled with wet coffee grounds when they’re disposed. Even if the plastic, aluminum and coffee could be separated, the pod is too small to be handled by most recycling systems.
“The pods are not really viable for any end-of-life scenario and, furthermore, they even prevent the coffee grounds from being composted,” says Adam Gendell, a packaging expert at nonprofit GreenBlue.
You’d think a compostable pod would solve the problem, but it’s not that simple. The Keurig packs must keep coffee fresh before brewing, withstand the heat, pressure and strength demands during brewing, and be easily puncturable with a needle as part of the brewing process, the company explains. Most compostable materials are unable to maintain quality or freshness, or to perform successfully in the Keurig system.
For now, Keurig sells a reusable mesh pod, but it doesn’t sell many, which is no surprise. A key selling point of the Keurig system is convenience – a reusable pod has to be cleaned after each use, like a conventional coffee maker.
“Keurig and Green Mountain, much to their credit, are really investigating this problem,” Gendell says. “They want to find a solution.”
That’s surely true, but KGM is trying to find a solution to a problem that is mostly of its own making. Shouldn’t someone – Bob Stiller or Green Mountain’s corporate-responsibility team – have seen this coming?
Matt Prindiville, a packaging expert with the nonprofit group Upstream, puts it this way: “Yes, they’ve got a market, they’re growing that market and we as environmental advocates have to wrestle with that. But people have been making coffee for a long time without K-cups. This is a step in the wrong direction, environmentally. By now, we should know better.”