Mondelez looks to emerging markets to drive growth

Mondelez looks to emerging markets to drive growth

As Kraft Foods completes the formal split of its business into two units today (1 October), Mondelez has its eye firmly on its growth strategy. The firm has set out a comprehensive agenda of what it wants to achieve. Michelle Russell reports on the path that Mondelez has chosen and how it hopes to drive sales growth for years to come.

Mondelez International will become a firm focused on the global snacks category today when its US grocery business is spun-off into a seperate entity.

The snacks business will consist of its units in Europe and in developing markets, as well as its snacks and confectionery divisions in North America. 

The North American grocery company will become Kraft Foods Group, retaining the Kraft brand for its corporate identity and as the brand for many of its consumer products.  

CEO Irene Rosenfeld, who will lead Mondelez, used the food group's presentation at the Barclay's Back to School Conference earlier this month as a signal of intent for the firm, during which she outlined the path Mondelez intends to take in order to stay ahead of the game and cement its marker in the categories it competes in.

And the company will have a good head-start.

Out of the gate, Mondelez said the business will have around US$36m in revenue, with about three quarters of its sales coming from fast growing snacks categories - biscuits, chocolate, gum and candy.

Growth in those categories is expected to come from three "cluster" markets, outlined by Rosenfeld. These will comprise the developing markets of the BRIC economies, "next wave" markets such as Indonesia, countries in the Middle East and Africa, and "scale markets", including Mexico, Japan, Australia, and "key" countries in Central Europe.

For Bernstein research analyst Alexia Howard, the strategic and operational stories outlined by Mondelez are "compelling".

"For Mondelez, 44% of sales in emerging markets is clearly well-ahead of the ~10% average of its US packaged food peers." She adds: "Growth in BRIC markets is a priority, especially given the opportunity for reaping revenue synergies from the Cadbury acquisition in countries like Brazil and India."

Kraft's recent launch of Stride chewing gum in China last month, it's first gum brand in the country, could also have a "meaningful value" over the longer term if the roll out is "successful in providing retailers with a credible alternative to Wrigley", Howard says.

Indeed, Rosenfeld said she expects that 44% contribution to "increase over time" and that it will be the developing markets that will be a "significant growth engine" for Mondelez on both the top and the bottom lines.

The CEO was keen to emphasise this at September's conference: "Our first priority is the BRIC markets. Brazil, India, Russia and China represent about a third of our developing market revenues and will receive the lions share of our resources. Over the next five years, these countries are expected to grow mid- to high-teens and account for a significant portion of our growth."

Senior analyst at Euromonitor International, Ildiko Szalai, believes India in particular will be a key focus market for Mondelez, given its status as "one of the most attractive confectionery markets in the world". Confectionery CAGR is also expected to grow 40% between 2012 and 2017, highlighting the need for major players to ensure they make their mark.

"We can see what companies are aiming to gain from this rapid growth and what they need to do, and they're going to require a double-pronged strategy," Szalai said. "One, to really target those consumer groups emerging ... the more rural [consumer] at the lower bracket of the purchasing power, with smaller unit prices and second, more mass market products.

However, she added: "At the same time the market is getting more sophisticated as spending power is growing and more premium products are emerging ... lower sugar and lower fat content. These are the driving engines for confectionery."

In India, Szalai points out that Mondelez will be competing against the largest sugar confectioner in that market, Perfetti Van Melle and Nestle, the latter also a serious competitor in the Brazilian market.

Indeed, Rosenfeld pointed to Brazil as its biggest market in the developing countries.

"In 2011, total revenue grew about 15% to more than $1bn. We generate about 80% from snacks and about 15% from beverages. Brazil is the only BRIC country where we have well-developed scale in all of our snacks categories and so our plan is to strengthen the fortress by building on our scale and strong market positions.

"We have already begun by investing in the North/Northeast part of Brazil where we are under-represented. We opened a new plant last year. In essence this region is a white space within the country which provides considerable growth opportunity in the future," she told investors.

Mondelez's chief also pointed to its success in the other BRIC economies. In Russia, Kraft's second largest emerging market, the group recorded revenue of around $1bn in 2011, with 70% of the portfolio in the country weighted to snacks.

In India, Kraft generated $0.7bn in revenue last year, with about 80% of that also from snacks, particularly chocolate.

The situation in China is similar, with the group recording around $0.8bn in 2011. Around 90% is also from snacks, largely biscuits.

But while Mondelez appears to have a tremendous amount of headroom in the BRIC markets, the company is keen to look beyond these markets to identify future growth opportunities in what it has called its 'next wave' markets.

These are markets, Rosenfeld says, that have "attractive" demographics and are largely untapped in many of its categories. Mondelez is forecasting revenue growth in the mid- to high-teens in these markets.

"Middle East and Africa generated $1.6bn in revenue last year. We are well-positioned to capitalise on this growth (population and wealth), we have a focused snacks portfolio led by Cadbury and supplemented by Tang and Bournvita. We can also leverage our geographic footprint from West Africa to the Middle East, as well as our established routes to market across the region."

Szalai highlights Indonesia in particular, in which Kraft has a 5.5% share of the market, as a "fast growing and large market". This compares to market shares in Brazil and India of 32% and 33% respectively.

"In the next wave markets, [Kraft's] presence is not that strong yet," she says, but adds that CAGR is expected to grow by around 10% from 2012 to 2017.

Mondelez's third priority cluster - its 'scale markets' which include Mexico, Japan, Australia, and key countries in Central Europe, represent over a quarter of its developing market revenue.

The company classes these are "large, more mature" markets, with "very attractive margins" and growth forecasts of low to mid-single digits over the next five years.

All three priority clusters account for around 70% of revenue in developing markets and Rosenfeld says they will drive the majority of the company's growth and profitability.

While developing markets, however, remain the growth engine for Mondelez, there is still remaining uncertainty about the macroeconomic environment in Europe.

"If you think about the overall unstable economic circumstances I think the consumer is still going to be seeking value for money and products which are good value for money," Szalai tells just-food, "as consumer spending power has really dropped."

Nonetheless, she adds: "Despite that, you can really see for most countries, as GDP growth turns negative, volume growth in food still remains positive. It is going to be a very fine line on how to add value to be able to create margin but still remain value for money in these territories. It's going to be a balance."

Kraft's president for Europe Tim Cofer told analysts at the Back to School Conference that the environment in Europe will "continue to be tough".

He did, however, sound an upbeat note on Mondelez's prospects in Europe: "We do see private label growing share in our categories, but importantly, not at our expense. We have grown market share in 72% of our business underscoring innovation.

Indeed, the strength of Kraft's brands in both its global snacks business and its North American grocery business in the developed markets has allowed it to stay ahead in the majority of its categories.

Cofer added: "Input costs will continue to be volatile but the pricing component of our growth algorithm is going to play less of a role in the back half and into 2013. In this environment I don't expect to see the revenue growth that we saw in the first half ... given our scale in Europe...I continue to think we are very well-positioned to drive top line growth and continued market expansion."

As for eking out growth in other developed markets such as the US, Morningstar analyst Erin Lash tells just-food Mondelez will be up against Hershey in North America where it maintains the CBY license.

This, she says, "isn't an area where Mondelez maintains the potential to realise growth".

Nonetheless, she adds: "Owning Halls (the number one candy brand in the world) is a plus but more generally, from our perspective, growth will ultimately be determined by whether brand investments (behind both product innovation and marketing support) are resonating with consumers.

"Confectionery products tend to be perceived by consumers as more of an affordable luxury - and so while not immune to a challenging consumer spending environment, sales of these offerings are considered to hold up better than other categories throughout the grocery store - particularly given that private-label penetration in the confectionery aisle is negligible relative to other food and beverage segments."

While Kraft has been keen to wax lyrical about its prospects globally and its strategy as a standalone company, Mondelez has said it will face currency headwinds in 2013, which it concedes will affect earnings.

It is targeting double-digit growth in operating EPS, excluding the impact of currency, over the long-term.

However, for 2013, Kraft said the recent weakening of various currencies against the US dollar will result in a 15 cents per share hit to earnings next year. As a result, Mondelez is expected to earn $1.50 to $1.55 per share in 2013, with organic sales targeted at the lower end of the range.

"Over the next few years, Mondelez's results are going to contain a high degree of noise," Lash tells just-food, adding: "What stood out to us in the guidance was not just the significant FX headwind it is forecasting but the fact that it was comparing to 2011 rather than 2012."

Mondelez, however, is loudly confident. The company describes itself as "a unique investment vehicle with several competitive advantages", namely "leading positions in fast-growing categories, an advantaged geographic footprint, a portfolio of the world's favourite snacks brands, an excellent new product pipeline with a proven track record of innovation, strong routes to market with significant barriers to entry and world class talent and capabilities".

A comprehensive list indeed. The company certainly believes it has all the ingredients in place for sustainable, profitable growth.

For just-food's look at the challenges and opportunities facing the US grocery business, Kraft Foods Group, click here.