According to our estimates, Cheese is the second most valuable business for Kraft Foods Group (NASDAQ:KRFT), after Grocery. As a leader in the U.S. cheese market with ~28% value share, we believe that the company is well positioned to tap into the growing market. Kraft’s popular cheese brands include Kraft Singles, Philadelphia cream cheese, and Velveeta. Here, we take a look at some of the key factors driving our forecast for the U.S. Cheese market.
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Kraft Foods Group manufactures and markets packaged food products, including beverages, cheeses, convenient meals and various grocery products. The company primarily deals in the North American markets, with the majority of its sales coming from the U.S. and Canada. It generates annual revenues topping $18 billion and has guided for earnings per share (EPS) target of $3.58 for 2013.
Our $58 price estimate for Kraft is almost in line with the current market price.
According to the data collected by the USDA economic research service, annual cheese consumption per capita in the U.S. has grown steadily from around 14.3 pounds in 1975 to 33.5 pounds in 2011, at a 2.4% CAGR. Cheese consumption per capita in the U.S. was at its peak in 2007 at 33.64 pounds, indicating the impact of the recession on consumption of cheese in the last few years. Below are some of the key trends indicating further growth in the per capita consumption of cheese in the U.S.
- Growth in the U.S. fast food market led by an increase in snacking habits among time-constrained consumers has contributed significantly to the growth in cheese consumption, as it forms a vital ingredient of nearly all fast food preparations, ranging from sandwiches to pizza. Today, consumers in the U.S spend ~50% of their total food expenditure outside homes.  A lot of this expenditure goes into buying fast food items such as burgers and pizzas. This trend also reflects in historical pizza sales in the U.S., which have grown from around $28 billion in 2000 to $35 billion and upwards over the last decade.  The overall fast food market in the U.S. is expected to reach ~190 billion this year.  We expect the continuing growth in the fast food market to drive higher per capita cheese consumption in the U.S. over the coming years.
- Versatility and adaptability to recipes, and growing varieties of cheese are also expected to drive consumption growth over the coming years. Kraft was able to reinvigorate its mature Philadelphia cream cheese brand by repositioning it as a recipe ingredient in 2010. The company was able to post double-digit sales growth in 2011 and continues to maintain leading position in the category. In December last year, the company also introduced Philadelphia Spicy Jalapeño Cream Cheese and added a couple of flavors to the Philadelphia Indulgence Spread. New varieties of string cheese were also added to the company’s strong lineup.  More recently in a bid to attract health conscious consumers, Kraft launched a cream cheese spread with twice as much protein than the regular cream cheese spread. ((Philadelphia unveils cream cheese spread with 2x protein, foodbev.com))
- Growing acceptance of ethnic cooking such as Mexican and Italian, which use substantially more cheese is also expected to drive higher per capita consumption of cheese.  Sales of ethnic foods in the U.S., including fresh produce, are estimated to reach $2.7 billion in 2015. 
Based on the above factors, we forecast a 1.75% CAGR in the per capita consumption of cheese going forward. This coupled with a 0.75% population growth, we expect volume market size for Cheese in the U.S. to grow at ~2.5% CAGR over the next few years.
Average cheese prices in the U.S. have increased at a 3.3% CAGR from 1911 to 2011.  Because food prices are highly volatile, we conservatively estimate real prices of cheese to grow at around 2% CAGR over the forecast period. Therefore, we expect Cheese sales in the U.S. to grow at ~4 % CAGR in the long run.
- Food Expenditures, ers.usda.gov [↩]
- USDA updates nutrient values for fast food pizza, ars.usda.gov [↩]
- Fast Food Sales To Hit $188 Billion in 2013, foodproductdesign.com [↩]
- Philly Cream Cheese’s Spreading Appeal, businessweek.com [↩]
- Kraft Keeps Innovation Flowing With 40+ New Products, kraftfoodsgroup.com [↩]
- American Tastes Branch Out, and Food makers Follow, nytimes.com [↩]
- ethnic foods market profile, agmrc.org [↩]
- Average Food Prices: A snapshot of how much has changed over a century, bls.gov [↩]