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May 18, 2022

Mondelez International strategy push hits sweet spot

Mondelez “advancing to the next phase of our company’s evolution, acceleration and portfolio focus”, CEO says.

By Dean Best

Mondelez International’s latest strategy update seems to have cheered Wall Street, with even the snacks giant’s planned disposals sweetening the mood.

Broadly speaking, Dirk Van De Put’s tenure as Mondelez’s chief executive – now into its fifth year – has attracted praise from the investment community and his plans for the company, updated and presented at an investor day last week, appear to have gone down well.

Mondelez says it wants to increasingly focus on chocolate and biscuits, areas already at the heart of the Cadbury owner’s portfolio. It is also eyeing expansion in baked snacks, a category the US group has grown in via M&A in recent months.

“Looking ahead, we will continue expanding our exposure to grow in profit pools in chocolate, biscuits and baked snacks,” Van De Put said at the Oreo maker’s three-hour investor update last Tuesday.

Analysts welcomed the increased focus on the three segments. “These categories are core to Mondelez, boasting attractive growth prospects, with annual sales growing in the mid-single digits, outpacing the low-single-digit marks that tend to characterise packaged food more broadly,” Erin Lash, director of consumer equity research at Morningstar, says.

Expansion in these product areas will, Van De Put explained, take in organic initiatives and further M&A.

Organically, Mondelez sees opportunities in “filling geographic white spaces”. Van De Put says, in some major markets, the company can be “skewed” to one category, pointing, for example, to the majority of the group’s sales in the UK and in India coming from chocolate, or its business in south-east Asia being predominantly in biscuits. “We are working hard to address this imbalance by leveraging our iconic brands and established distribution, as well as strategic transactions,” he explained.

Aside from geography, Mondelez also sees the chance to expand in two other areas – high-growth sales channels and selling products at different price points.

Mondelez wants to bolster its e-commerce sales globally so that, by 2030, the area accounts for 20% of its sales, up from 6% today. Elsewhere, the Milka chocolate maker is eyeing “traditional” outlets in emerging markets, discount retailers in Europe and “alternative channels” in the US, such as convenience stores.

A recent example of these efforts is Mondelez’s acquisition, announced three weeks ago, of Mexico-based confectioner Ricolino from bakery behemoth Grupo Bimbo. Ricolino, Van De Put says, “provides strong route-to-market capabilities in the traditional trade and gives us a platform to further develop our biscuit business”.

On price, the Lu biscuits owner is looking to expand its presence at both ends of the pricing spectrum, with efforts on cheaper and more expensive products.

“While we primarily play in mainstream price points, we see strong opportunities to better penetrate opening price points, while trading consumers up to premium price points,” he insisted.

Van De Put said Mondelez is “under-represented in low-priced products, like small-sized, single, chocolate bars” in emerging markets. Efforts could bear fruit against the backdrop of pressure on consumer incomes.

Similarly, the Mondelez chief says the business needs to bolster its presence in the “premium” end of its categories in emerging and developed markets, though, at present, the company may need to tread carefully with consumer purchasing power being crimped by inflation. When Mondelez announced its first-quarter results last month, the Toblerone maker said elasticity had, so far, been below usual levels but CFO Luca Zaramella indicated the company’s plans to increase prices again to try to absorb continued pressure on costs means it expects “we will return to more historical levels of elasticity later this year”.

After making eight acquisitions in four years, it appears Mondelez’s appetite for more deal-making remains healthy. “Our M&A approach has three key components. First, we prioritise finding the right opportunities with attractive, sustainable, profit pools and rigorous return metrics. Second, we rapidly deliver value through strong integration and effective cost and sales synergies. And, finally, we work to optimise growth through targeted investments with a focus on filling whitespaces, delivering multi-category strength and filling capability gaps.”

At Morningstar, Lash says: “We anticipate that it will remain a consolidator, with a hunger to expand in untapped categories and/or geographies from time to time.”

On the other side of the ledger, Mondelez has now announced plans to sell its chewing-gum business in developed markets and offload cough-sweets brand Halls, assets that have been in the doldrums for a while.

“These decisions free us to concentrate on our core chocolate and biscuit franchises and reinvest in those businesses,” Van De Put said.

The news, particularly on gum, raised few eyebrows, particularly as Mondelez announced last year it was reviewing the business.

“No big surprises on the Mondelez gum business. They’ve said publicly that they’ve been looking for options on that for quite some time,” Alexia Howard, a research analyst covering US-based food companies for AllianceBernstein, tells Just Food.

“And not that surprising that they’ve thrown in Halls cough candy to sweeten the deal, as the developed market gum business has been in decline for some time, whereas Halls was hit hard by the initial lockdowns of the pandemic but is likely recovering as we are all mingling and getting coughs and colds more easily these days.”

She adds: “[It’s] interesting that the Stride brand was not included on that slide (Trident is obviously the flagship in developed markets), presumably because Stride is the longer-lasting brand and the one they have launched into key emerging markets like China.”

Analysts covering Mondelez at US-based investment bank Stifel estimate the gum and cough-sweets assets the snacks major is looking to sell amount to about 3% of its group sales (so, circa $920m) and “are declining at approximately 10%”.

In a note to clients, the Stifel analysts added: “With its M&A playbook, we expect Mondelez to continue accelerating its growth profile through increased exposure to snacking, snacking adjacencies, well-being products, premium segments, and geographical expansion of the core business into white spaces – areas where the company’s eight acquisitions since 2018 focus.

“The company continues to hold a high degree of optionality through its strong balance sheet, with net leverage standing at 2.5x and close to 1.5x when considering the $6.2bn or so value of its equity stakes.”

Van De Put points to the shareholdings Mondelez holds in beverages business Keurig Dr Pepper and coffee-and-tea supplier JDE Peet’s. “We … have sizable equity stakes in KDP and JDE Peet’s, which provides significant firepower for growth-accretive, snacking M&A going forward.”

The Belvita biscuits owner added another sprinkle to its update with a move to increase its forecast for long-term, annual, sales growth, lifting it from at least 3% to 3-5%.

“We are extending our leadership positions in attractive and resilient snacking categories. We are leveraging our competitive advantages and investing in brands and capabilities to maintain momentum,” Van De Put reflected. “And now we are advancing to the next phase of our company’s evolution, acceleration and portfolio focus.”

Of course, Mondelez, like most, if not all, global food heavyweights, is wrestling with a range of challenges, from inflation and supply-chain disruption to the Ukraine war. These will be giving Van De Put and his colleagues plenty to chew over.

However, his record since taking the helm (as Morningstar’s Erin Lash points out, 4% organic sales growth on average since 2018 and 110 basis points of adjusted operating margins expansion) is nothing to be sniffed at.

And the recent work to reshape the portfolio (with more to come) is leaving investors, so far, feeling well-fed.

“While we aren’t sweet on shares, which trade about 5% above our intrinsic valuation, we think investors should keep this leading global snacking manufacturer on their radar, with a number of challenges (inflation, supply chain disruptions, and geopolitical angst) on the horizon the next several quarters,” Lash reflects.

Stifel is continuing with its ‘buy’ rating on Mondelez’s shares. It has a target price on the stock of $71, based on assigning a 17x EV/EBITDA multiple to the bank’s 2023 estimates.

“Mondelez remains a best-in-class global consumer staples company,” they argue, “as evidenced by its strong sales growth momentum driven by its category exposure, country exposure, and leading market share positions.”

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