Kraft Foods

(KFT)

is the second largest food and beverage company in the world after

Nestle

(NSRGY) - Get Report

It also competes with

PepsiCo

(PEP) - Get Report

,

General Mills

(GIS) - Get Report

and

Kellogg

(K) - Get Report

.

The company manufactures and markets packaged food products including chocolates, gums, snacks, beverages, cheeses, convenient meals and various packaged grocery products. Kraft operates in over 80 countries and distributes products to about 170 countries.

Recently,

Starbucks

(SBUX) - Get Report

decided to unwind its agreement with Kraft, under which Kraft distributed Starbucks bagged coffee as well as its Seattle's Best coffee brand in supermarkets and other food retailers since 1998.

Although Kraft manufactures and distributes both food and beverages, the beverage division accounts for only 12% of our Kraft stock value estimate and so the potential downside to a loss in beverage market share is small in the context of the company's total operations.

We maintain a stock value estimate of $35.56 for Kraft, which stands about 16% ahead of current market value.

Kraft and Starbucks began arbitration proceedings late last month as Kraft tried to prevent Starbucks from ending the agreement. Kraft asserts that is has contributed towards growth of Starbucks' packaged coffee business from $50 million in revenue to about $500 million over the last 12 years.

Drag the trend-line in the chart below to see how various beverage market share shifts affect Kraft's stock value.

We currently project that Kraft's market share in beverages will increase to around 15% by in the coming years with further growth of its own Jacobs and Maxwell House coffee brands coupled with a shift of consumers from high calorie carbonated drinks to healthy and nutritious juice drinks.

However, the loss of the Starbucks partnership could pose potential downside. Starbucks could challenge Kraft's market share through a partnership with another distributor like

Green Mountain Coffee Roasters

(GMCR)

(which sells Keurig coffee machines and the popular K-Cup coffee packets). Starbucks could also distribute its own product as it attempts to grow its packaged coffee and tea business, which seems likely given the emphasis on this are in its recent earnings announcement.

The loss of the Starbucks partnership presents downside risk to Kraft's beverage market share. Our estimates currently project growth in Kraft's market share of nearly 100 basis points over the Trefis forecast period. However, if Kraft's market share drops instead to 13% (in line with 2006 levels), the stock value downside would be around 3%.

See our full analysis of Kraft

here

.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.