Coffee Giant
Starbucks Corporation
(
SBUX
) recently announced that its much-awaited premium single cup
domestic coffee machine, Verismo, will now be available at its
website Verismo.com. Verismo system is a premium machine that will
allow customers to prepare Starbucks-quality espresso and coffee
drinks at home, using milk pods also developed by Starbucks.
Verismo is expected to be available at company stores and select
high-end specialty retailers starting early October, mainly in U.S.
and Canada.
The Verismo single cup coffee machine 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. 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
), 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 the partnership,
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. Share price of Green Mountain
dropped after the announcement of this news. However, when Verismo
was announced in March this year, Green Mountain's management had
ruled out any competition between its high-pressure Verismo machine
and the low-pressure Keurig machine. However, shares of Green
Mountain had witnessed a sharp decline after the Verismo was
announced. Starbucks will continue to supply K-Cup packs to
Green Mountain.
The premium coffee segment now accounts for over 50% of the
total coffee sold in 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 #4 Rank (a short-term 'Sell' rating).
Starbucks' third quarter earnings missed both the Zacks
Consensus Estimate as well as company expectations. The
lower-than-expected results were due to soft consumer traffic
trends in the U.S. in June and a weakening global consumer
environment. Following the third quarter miss, 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.
GREEN MTN COFFE (GMCR): Free Stock Analysis
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STARBUCKS CORP (SBUX): Free Stock Analysis
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