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Coffee giant Starbucks Corporation (SBUX - Analyst Report) recently announced that its premium single cup domestic coffee machine, Verismo, will now be available at more than 65% of its retail stores. The Verismo system is a premium machine that will allow customers to prepare Starbucks-quality espresso and coffee beverages at home, using milk pods also developed by Starbucks. Verismo was previously available through Verismo.com and at Specialty Retailers since September.

The Verismo single cup coffee machine is a major step by the company to grab a share of the premium single-cup segment, which is the fastest growing market in the coffee industry. Starbucks already has a presence in the premium single serve market with its Starbucks VIA Ready Brew instant coffee and Starbucks K-Cup packs.

Starbucks also has a partnership with Green Mountain Coffee Roasters (GMCR - Analyst Report), whereby it sells the K-Cup packs to Green Mountain to run on the latter’s Keurig Brewers. Earlier this year, Starbucks expanded its partnership with Green Mountain, by virtue of which, Starbucks will manufacture and sell Starbucks-branded Vue packs that can be used on Green Mountain’s newly-introduced Keurig Vue single-cup machines starting this fall.

The Verismo machine is expected to pose strong competition to Green Mountain’s Keurig Brewers, though Green Mountain’s management had ruled out any competition between the high-pressure Verismo machine and the low-pressure Keurig machine. However, shares of Green Mountain had witnessed a sharp decline after the Verismo launch was announced. Starbucks will continue to supply K-Cup packs to Green Mountain.

The premium coffee segment now accounts for over 50% of total coffee sold in the US grocery, drug, and mass channels. Starbucks owns 28.2% share of premium coffee in these channels. In the premium segment, premium single cup makes up 20% of the market. Starbucks, through the VIA Ready Brew and Starbucks K-Cups, commands 22% share of the premium single cup market, which is a huge improvement from zero presence in this segment just 2-3 years back. The premium single-serve category is expected to become an $8 billion market globally. The Verismo system and the expanded partnership with Keurig on the Vue platform are expected to help Starbucks capture further share of the premium single cup coffee segment.

Our Recommendation

We currently have a Neutral recommendation on Starbucks. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).

The soft consumer traffic trends in the U.S. and a weakening global consumer environment is affecting the company’s performance. In fact, the company cut its outlook for the fourth quarter due to the economic downturn.  Further, poor sales in Europe due to depressed macroeconomic conditions and rising cost of commodities, especially coffee, also concern us. Despite the short-term headwinds, we like the long-term prospects of this coffee giant. We are encouraged by Starbucks’ strong market standing, new product launches, rapid growth in China and the flourishing Channel Development segment as well as solid turnaround in its U.S. business.

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