Mondelez wants to boost margins in North America, Europe to pay for investment in emerging markets

Mondelez wants to boost margins in North America, Europe to pay for investment in emerging markets

Oreo and Cadbury owner Mondelez International has revealed more details on its plans to boost margins, which will see it revamp its production network, do business with fewer suppliers and offer fewer SKUs.

The snacks giant is looking to improve its profitability in North America and Europe in order to pay for further investment in emerging markets. After outlining its plans in May, the company yesterday put more flesh on the initiatives, which will "subscale" factories closed, new plants opened on greenfield sites, fewer suppliers contracted and fewer SKUs on sale.

Mondelez is closing "a dozen plants and distribution centres around the globe", while opening eight new "flagship" plants, including the factories already announced in Mexico and India, Daniel Myers, the company's executive vice president for integrated supply chain, said. The moves will help boost Mondelez's capacity by 25% over the next three years, he said.

By 2020, Mondelez also plans to build five more greenfield sites and double capacity at 16 "existing strategic sites", while "consolidating" other factories and distribution centres, Myers said.

The company has moved to work with fewer suppliers to reduce costs and has plans to cut its product portfolio. Mondelez has said the changes are set to lead to over $3bn in productivity savings. It has set a target of improving its annual operating income margin by 60-90 basis points to help it step up its investment in emerging markets.

"We're building an integrated supply chain organization that's laser-focused on delivering a demonstrable competitive advantage and generating savings we can reinvest in our growth," Myers said.

The company is, for example, installing Oreo manufacturing lines that it says will need 30% less capital and reduce operating costs by $10m a line. Similar moves will be made for Mondelez's chocolate and gum production.

Speaking to investors and analysts at the Barclays Capital Back-to-School conference, Myers pointed to the difference between Mondelez's planned new biscuit plant in Mexico and its older operations.

"It will be dramatically different from the average operations of our plants around the world today," Myers said. "Instead of a typical footprint of 15 to 25 acres, this site has a 125. It's adjacent to two major railroad lines and major highways that serve Mexico and the rest of the Americas. we have worked with the government to reserve 250 acres for use by strategic suppliers. We'll also have a distribution center onsite to enable to direct shipments to customers. This plant will require only about one-third of the staff to produce the same capacity as one of our older facilities to date."

Latin America also provided an example of Mondelez's work to streamline its supplier base, Myers said. He revealed the company was spending $50m on over 400 flavour specifications for its Tang powdered beverage business from 22 suppliers.

He said: "We partnered with a single supplier to architect a winning product assortment. Working with a strategic supplier we developed exclusive technology to deliver bigger, better flavors, an 80% reduction in specifications. As a result, we reduced costs by 20%. We're developing stronger more strategic partnerships with fewer suppliers."

Those changes will also help Mondelez's quicken its product innovation, Myers claimed. The company is looking at its product portfolios and "zeroing in on key consumer needs". 

He added: "This enables us to eliminate SKUs, reduce complexity and deliver preferred products with stream line technology on fewer production lines. For example, when we acquired the Lu biscuit business, it had over 4,000 SKUs in Europe. By applying simplification tools that number will fall to 2,500 by 2016."

When Mondelez was formed after the spin off of the former Kraft Foods' North American grocery business, the company emphasised it would have the ability to capitalise from growth in emerging markets. Chairman and CEO Irene Rosenfeld said when Kraft split in two last October developing markets would be a "significant growth engine" for Mondelez's top and bottom lines.

There have been some initial concerns on Wall Street about Mondelez's performance in emerging markets and some analysts have said the company needs to up its investment. The company's productivity savings will, it says, provide it with the funds it needs through improved margins in North America and Europe.

Speaking to the conference, Rosenfeld said Mondelez could reach its margin target in North America earlier than it had planned.

"In North America, we're targeting a 500-basis-point improvement in operating income margin, and we now expect to reach that target by 2016, a year earlier than originally anticipated," Rosenfeld said. "In Europe, we're targeting an improvement of 250 basis points in operating margin, which we also expect to reach by 2016."

The plans also come amid public concerns about Mondelez's margins from activist investor Nelson Peltz, who owns shares in the company and has pushed for the company to merge with PepsiCo.

In July, Peltz's Trian Fund Management investment vehicle identified a 400 basis point margin opportunity - consistent with management's long-term 14-16% margin target. However, Peltz was apparently working to a different timetable, telling a conference that month that he is "not getting any younger".

"Mondelez expects to deliver just an average 20-30 bps of expansion during the next three years, given significant reinvestment plans in its emerging markets businesses. We suspect Trian would likely push for the full magnitude of margin, albeit on a much more truncated time table," Barclays Capital analyst Andrew Lazar noted at the time. Peltz was scheduled to meet Mondelez's management this summer.

At the Barclays Capital Back-to-School conference yesterday, Mondelez was asked if the fact it expected to meet its North American margin target early meant it could also meet its goal for company margins earlier than planned.

CFO Dave Brearton said: "North America is 20% of our business so won't make a dramatic change. But I would say clearly we have in our eyes the idea that we would like to get there as quickly as we can. So, if we're able to get there quicker than the five years we've laid out clearly we will. Daniel here is trying to help as much as he can by accelerating as much of the savings programs as we can. But clearly we’ll try to get there as quickly as we can."

Rosenfeld added: "Our savings that we've identified are predominantly in gross margin; it's about network resets, it's about reconfiguring supply change and that's just takes a little bit longer. So, part of the timing has to do with just the reality, once we identify the opportunities, how fast we can go after them."