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Coffee giant Starbucks Corporation (SBUX - Analyst Report) recently announced plans to launch the Verismo system, a premium machine which will allow customers to prepare Starbucks-quality espresso and coffee drinks at home, a cup at a time.

The Verismo single cup coffee machine will be available by fall 2012 and is a major step by the company to take a share of the premium single-cup segment, which is the fastest growing market in the coffee industry. The premium single cup segment grew more than 135% over last year in the US and is expected to become an $8 billion market globally. The machine will allow customers to brew espresso based beverages and milk-based beverages on their own, at their workplace or at home.

The Verismo system will be sold online, at some Starbuck retail stores and also in some specialty stores in US, Canada and in other unspecified international markets. Starbucks will market and sell the Verismo machine and arabica coffee and milk pods through a strategic partnership with privately-held, Germany-based Krueger GmbH & Company.

Starbucks already has a presence in the premium single serve market with its Starbucks VIA Ready Brew instant coffee (launched in 2009) and Starbucks K-Cup packs (launched in fall of 2011). Starbucks sells the K-Cup packs to Green Mountain Coffee Roasters (GMCR - Analyst Report) to be used on the latter’s Keurig single-cup machines. Management believes the Verismo system is complementary to the above products and Starbucks can now offer a comprehensive portfolio of premium single cup alternatives.

Starbucks ruled out any competition between its high pressure Verismo machine and Green Mountain’s low pressure Keurig machine. Starbucks believes its high pressure machine will be competitive with Nestlé’s Nespresso machine. Shares of Green Mountain, however, witnessed a sharp decline after the announcement of the news. Starbucks will continue to supply K-Cup packs to Green Mountain.

We expect Starbucks to go off to a strong launch with the Verismo System. However, we cannot rule out the fact that at-home, single-cup machines like Verismo can cannibalize sales of other Strabucks products.

Our recommendation

We currently have a Neutral recommendation on Starbucks. The stock looks more appealing near term with a Zacks #2 Rank (a short-term ‘Buy’ rating).

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