Kraft's Beverage Share Can Improve with Economy

By Trefis Team,

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Kraft Foods ( KFT ) is the world's second largest food and beverage company after competitor Nestlé ( NSRGY ). It also competes with PepsiCo ( PEP ), General Mills ( GIS ) and Kellogg ( K ). Although the company manufactures both food and beverages, beverages account for only about 13% of its stock.  We believe that Kraft's beverages business could see market share gains as the economy improves and consumer spending on premium beverage products increases.

Kraft's Beverage Business

Kraft manufactures beverages like coffee, aseptic juice drinks, flavored water, and powdered beverages. Some of the popular brands include Maxwell House, Kool-Aid and Country Time. Our estimates of Kraft Foods' market share in the global beverage market (which includes ready-to-drink tea and coffee, powdered beverages, packaged juices and chocolate drinks)  stood at a little under 14% in 2009 [1].

The share experienced a dip during 2009 as the recessionary environment led to consumers cutting down on expenses and choosing less expensive alternative products. We expect a slow recovery in the Kraft Foods' beverage market share and expect it to reach past 14.5% by the end of our forecast period. The following factors should aid Kraft in this process.

As the economy improves, premium brands should help Kraft gain market share

Kraft's premium beverage brands like Jacob, Maxwell House, Kool-Aid and Tang are very popular among consumers and contribute significantly to sales. In fact, Jacob and Maxwell House each generate more than $1 billion in revenues for the company. As the economy improves and some of the consumers switch back to these premium brands, Kraft Foods should see an increase in their share of the beverage market worldwide.

Increasing popularity in Asia and Latin America

In Asia, Kraft's priority brands posted a 30% revenue growth in Q1 2010 led by Tang powdered beverages [2]. Priority brands are company specific brands that have popularity among consumers and are major contributor to overall revenues. Similarly, in Latin America, Tang powdered beverages led the priority brands revenue growth of 22% in the first quarter of 2010 [2].  The company has stated that the Philippines is one of the most important markets in the Asia-Pacific region and has posted double digit growth for the past several quarters.

While there are positive signals, we remain conservative with our forecasts as we see continued economic weakness in Europe where the company has achieved much lower growth in the recent past.

You can see the complete $36 Trefis price estimate for Kraft Foods here.

[1] Kraft's beverage market share is based on Kraft's reported beverage revenue and the beverage market size.  We've taken the beverages market to consist of ready-to-drink tea and coffee, powdered beverages and juices. We have individually estimated the market size for each of these beverage products and then combined the numbers to obtain the total beverage market.
Additional details on the sources used for each market can be obtained here (see how we got historicals section)
[2] Taken from Q1 2010 earnings transcript

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: GIS , K , KFT , NSRGY , PEP

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